FOREIGN MARKET ANALYSIS

Political environment

Cultural environment

Legal environment

Economic environment

Political environment

Political environment

The political environment of the international business includes national and international political factors that can influence the operations of the organizations or their decision making.

Doole and Lowe

The political environment-Influence areas

a) The nature of the regulation frame

b) The degree of governmental control on the activities developed by multinational companies

c) The relative importance of various pressure groups from a country

d) The possibility of commercial embargoes

e) The degree of losses derived from political risks and to what extent insurances can be signed

f) The tax system for certain countries

Political systems

Forms of Political systems

Democracy

Parliamentary democracy

Presidential democracy

Totalitarianism

Theocratic totalitarianism

Monarchy Dictatorship

Totalitarianism

Totalitarianism = form of government where the freedom of individuals is completely subordinate to the state authority and concentrated in the hands of one person or a small group who is not constitutionally accountable to the people.

Totalitarianism-seq.

(a) The theocratic totalitarianism: a political system under the control of

religious leaders

Example: Afghanistan and Iran are examples of political dispersion.

(b) The monarchy: the king is the supreme power and the country is ruled by the royal family

Absolute monarchy

Constitutional monarchy, depending on the degree of decision making and the degree of control.

(c) Dictatorship: power is held by one person in an autocratic manner. It is based on the obedience principle according to which the people are efficient and productive when forced to follow certain rules and regulations.

State ownership

Exercising state ownership on state goods is centralized economic

planning (regular plans formulated and implemented by the state) = administrative fixed prices + quantities of economic goods set by the center

The state allocates resources (including credit, employment or currency) according to political criteria / goals, often in total ignorance regarding profitability.

The failure of the "economic calculation" in socialism

Prices can only be administratively fixed (including the exchange courses with foreign currencies), taking into account the absolutely arbitrary aspects this arbitrariness leads to ignoring the scarcity of resources as well as the consumer preferences of the population

The concept of profit / loss is purely arbitrary and accidental

The participation of socialist countries in the international economic

relations

the absence of any market price automatically leads to a pronounced

isolation of the socialist countries regarding the international economic circuit the exchanges were politically made, without a real economic calculation

Example: Between two socialist countries it is impossible to form a price for two goods as long as there is no exchange market using barter is also hindered by the political establishment of prices for any goods the socialist countries would 'copy' the prices on the international market in order to conduct trade with each other or with Western partners

Democratic political systems

The elements of the political system

an electoral system,

a system of political parties,

a representative assembly

a system to express the

sectional interests.

1. An electoral system a system of regular elections (ex: every four or five years) based on

universal suffrage expressed by the adult population; freedom of expression, movement and group affiliation, and so on; The lack of constraint and the absence of illegal electoral practices; press freedom. 2. A system of political parties Democratic political systems-seq.

3. A representative assembly Representative Sovereignty, (meaning the legitimate power to make decisions)

4. A system to express the sectional interests Pressure group lobby Professional lobbyist- is often a politician or a bureaucrat familiar with the structure

of decision-makers in the government and with access to certain decision-makers

The failures of market economy

1. The markets produce goods and services that are unprofitable or not practical to be provided by private means- "public goods

2. The underproduction of "merit goods

3. The failure to take into account the external costs and production and consumption benefits- "externalities

4. The danger of developing a monopoly power where businesses can be bought and sold freely.

5. Under use of economic resources

6. The tendency to determine and distribute the return based on the ability to pay and not based on need or equity.

Why does the state interfere in the economy?

Providing public goods (security, defense, justice, infrastructure, etc.)

Correcting the failure of the market (abolition of monopolies, cartels, etc.)

Redistribution (for certain disadvantaged social groups)

Mining ("rent-seeking")

Etc.

The political risk

The political risk is the likelihood that the political forces negatively affect the companys profit or impede the achievement of other critical business objectives.

The forms of political risk:

1. Expropriation the confiscation in order to pay compensation (see confiscation)

2. Credit risk

3. The ethnic and religious risk

4. Conflicts of interest

5. Corruption

The problem of expropriation / nationalizations

The Expropriation = the firms involuntary / forced waiver of its private ownership over economic goods (= also includes forms of expropriation with compensation)

Special Problem = the case of foreign direct investments (when the expropriated firm is from another country)

Factors that determine the expropriation:

nationalism / populism;

The government is less democratic,

The short-term horizon of the government; ("The villain that stays" versus "the villain that runs")

The lack of check-and-balance system ("veto players") = independent institutions to comply with the law (example: an independent judiciary system)

Corruption:

The Agency theory + the massive intervention of the state in the economy more and more opportunities for corruption: State agents accept a material compensation for "favoring" certain

economic agents

from the firms perspective, bribery is an additional cost of the business operation = from the theoretical standpoint, ignoring other elements, the most efficient producer would be able to offer the highest bribe;

However, the "adverse selection" appears = those who succeed following the "political way" are different from those who succeed following the "economic path".

The Management of Political Risk

a Management in advance - The growth of discount rates

- The reduction of the investment flow

- "Arrangements" with the government from the host country

- Increasing Ownership

- Ensuring the risk

b. Management during the project

- Joint ventures or licenses

- Political support

- Diversification of the organizational structure

- Planning and forecasting

c. Management that follows the nationalization

- Negotiations with the government

- Generating political and economic pressures

- Arbitration

- Court proceedings

Cultural enviroment

What is culture?

The culture and its impact on business

Culture is the context in which a company (people) activate !

Culture is ....

The mental programming of the mind which distinguishes the members of a group from the members of another group. .. including value systems "(Hofstede, 1980)

The 'Glue' that unites different groups of people. Without cultural typologies, organized systems of significant symbols, people would find it difficult to cohabit together (De Mooij, 2004)

Set of control mechanisms - plans, recipes, rules and instructions - necessary to ensure the rules (Geertz, 1973)

Beliefs, attitudes, norms, rules and values belonging to the speakers of a particular language who live or have lived in the same period in a particular geographic area (Triandis, 1995)

Defining culture-base concept

"Man is a part of the environment" Herskovits

Culture incorporates:

1. Objective / tangible elements: tools, infrastructure, television programs, architecture and other physical artifacts

2. Subjective elements: rules, values, ideas, customs and other symbols

Culture features (1)

1. It is not a good or a bad thing: culture is relative, not absolute

2. It is not inherited - it is learned. The culture is transmitted based on a process of learning and interaction with the environment and not on a genetic basis.

Ex Amram Scheinfeld, American-Chinese man

Culture features (2)

3. Does not represent an individual behavior

Acculturalization = process of adapting to a culture

4. Influences the biological processes:

Ex Clyde Kluckhohn

Ex what we eat, how often and how much we eat, with whom we eat

The intangible elements of the culture such as ideas, values and beliefs can cause adverse effects on the human body

Culture features (3)

5. The existence of some universally valid cultural features

The differences between cultures result from the manner in which the universal social needs are met:

Economic systems / economies

Family & Marriage

Educational Systems

Social control systems

Supernatural beliefs

Culture features

Culture is learned

Culture is common to members of a certain group

Culture determines the behavior of the members of the group

Culture generates the depth of life-traditions, customs

Culture determinants

Institutions

Norms

Values

Believes

Religion

Language

Educational system

Aura and aesthetics

Life style

Characteristics of certain world religions

The challenge of overcoming cultural boundaries

Cultural risk = a situation or event that causes a break due to cultural differences

The challenge of overcoming cultural boundaries

1. Ethnocentric Orientation - using their own culture as

standard for the interpretation of other cultures ("home country orientation" Haward Perlmutter)

2. Polycentric Orientation the company manager identifies well with the host culture

3. Geocentric orientation - the company manager is able to understand a business or a market without regard to national borders

The influence of culture on the IBE

Developing new products

The communication and interaction with foreign business partners

The selection of foreign partners and suppliers

Negotiating and structuring the international sales

Interacting with the overseas clients

Preparing fairs and missions in foreign countries

Preparing promotional and advertising materials

Cultural differences- THEORIES Dr. Geert Hofstede -5 cultural dimensions

1. Power Distance Index (PDI)

2. Individualism (IDV)

3. Masculinity (MAS)

4. Uncertainty Avoidance Index (UAI)

5. Long-Term Orientation (LTO)

Cultural differences- THEORIES

Dr. Geert Hofstede -5 cultural dimensions

Cultural differences- THEORIES

Richard Gesteland - 4 models of intercultural behavior

1. Focusing on closing the deal versus relationship building

2. Informal cultures vs. formal cultures

3. Rigid time vs. fluid time

4. Expressive cultures vs. rigid cultures

Culture myths Culture levels

National, professional and enterprise (corporate) culture

Corporate culture - steps in development & implementation

Identifying the common benefits for

employees

Reaching a consensus

Documentation relating to future actions

Cultural awareness by all employees by implementing rules

Training for new employees

Interpretation of Culture

Cultural metaphors = distinct tradition or institution associated with a particular society Example: stuga, tranquility, Turkish coffeehouse, Israeli kibbutz, jeito or jeitinho Brasileiro

Stereotypes (maana syndrome) = generalization of a group of people or situations

Metaphors = Expressions whose symbolic meaning differs from the literal one

Cultural Management Lee actions (1966)

1. Identifying the problem or target based on the culture, customs and regulations of the country of origin

2. Identifying the same problems based on the culture, customs and regulations of the host country

3. Limiting the influence of CSR on the problem

4. Redefining the problem without regard to CSR and its solution being based on the situation specific to the external market

Typology of cultural indicators

1. Defacto indicators: climate, land, facilities, infrastructure

2. Traditional indicators

3. Legal indicators

4. Indicators of the marketing mix

Culture and publicity http://www.youtube.com/watch?v=0VNjHaeJLKE&feature=related

The economic environment

The economic factors that influence the IBE

The economic environment influence factors

Types of economic systems: Central- planned economy

Free market economy

Mixed Economy

The level of income and inflation

Financial, industrial stability

Monetary and fiscal policy

1. Types of economic systems - Central- planned

economy

the means of production are publicly owned

the economic activity is controlled by a central authority

the centralized plans determine the type of goods to be produced, allocate the raw materials, fix the production rates for each company and set the prices.

The company:

The management policies are conditioned by political and social reasons and less by the profitability laws and the consumers requirements

The quality depreciation of products

Encouraging the corruption and the "black economy"

2. Types of economic systems - Free market economy

is based on the private property the consumer sovereignty (the essence of capitalism is given by making

the economic production available for the consumer)

the capitalism, through the social competition system ensures its own stimulus (catalactic competition)

places freedom as the basis of the economic and social building (the individual is able to choose how they wish to integrate into the society mainstream, economic freedom also includes the freedom to fail)

makes the profit and its pursuit by the entrepreneur a perpetual driving force

ensure its dynamics and vitality through a continuous process of selection

3. Types of economic systems - Mixed Economy

A system that combines the private competitive enterprise with a certain degree of central control.

The allocation of resources among different uses is determined in large measure by the price mechanism

The authorities play a role in determining the level of aggregated production through the fiscal and monetary policy, and in the distribution of income, through progressive taxation and welfare legislation

The inflation

= Price increase over time

Measures the change in the purchasing power of money

Consumer Price Index measures the changes from month to month in the price of goods and services included in a representative "basket" purchased by an ordinary consumer

The goods and services in the basket are weighted differently to reflect the proportion of expenses that an ordinary consumer makes

Causes of inflation (1)

The increase of the labor costs unrelated to the growth in the labor productivity

The increase of the raw material costs, when the demand for raw materials exceeds the supply, on a short term basis

A deterioration of the exchange rate, that determines the increase of the price of imported goods

Monetarists: the control of the currency level in an economy: quantity (money supply) or the price (interest rate)

3. Causes of inflation (2)

The demand-pull and cost-push approaches:

The "Demand-pull" inflation = is a type of inflation caused by excess demand, which raises prices;

"too much money chasing too few goods

The "Cost- Push" inflation = is a type of inflation caused by the significant increase in the cost of imported goods and services

For which there are no alternatives on the domestic market

The role of financial institutions

The elements of the financial system:

1. Lenders and borrowers:

Individuals, organizations, governments

2. Financial Institutions

3. Financial Markets transfer of money or assets

Money market

Capital market

Stock exchanges

Fiscal policy

Taxation = the main instrument the state has to:

extract resources from the society

try to alter the behavior of individuals (by changing their motivations). Ex. excise duties on products considered luxury products

try to track the economic policy objectives. Ex. Economic growth / development, etc.

Taxation

Direct = paid by the people (individuals and companies to the state) - the charge concerns them 'directly' the taxes on the profit or income, on the property, inheritances etc.

Indirect = paid by intermediaries the tax "aims" at certain goods or services VAT, customs duties, etc.

It is argued that the indirect taxes can be "passed on" ("shifted") by the intermediary towards the user / final consumer (meaning that the intermediary adds to the initial price the tax and therefore he "does not pay" directly) the direct taxes can not be "shifted"

Note: "shifting" is not yet "perfect" because the increase in the final price (initial price + tax) leads to the decrease in the demand (= the intermediary sells less)

The advantages of the "single share" in terms of its supporters

It simplifies the tax formalities. Ex. in the U.S. there are 894 types and

levels of taxes it is estimated that the hidden costs (example: tax advice) would reach up to USD 100 billion per year;

Promotes "social justice". Ex. an individual 100 times richer pays a fee 100 times higher the progressive taxation is "unfair

Prevents the "tax advantages", therefore special interests and so forth (in the philosophy that a lower tax gives the recipient an advantage over one who pays a higher fee);

Accelerates the economic growth, reduces unemployment (?!) and so on

The international dimension of taxation

Internationally, there are two tax systems:

Residence / territorial-based taxation = a state charges all the residents from its territory (those that operate between national borders) general principle

Taxation based on nationality = a state charges, in addition to the territorial criterion, also the citizens revenues achieved abroad (for activities developed abroad) a small number of countries (example: USA, Israel)

The treaties to avoid the double taxation = agreements between states that share the total tax paid by international companies between the home state and the implantation one the state of implantation has "priority" (the host)

The effects of differences in taxation

= The fiscal arbitrage of individuals = when takes the decision to locate a foreign direct investment in a certain country, an investor may also take into account the tax level ceteris paribus, will prefer to invest in a low-tax country

If the high-tax country is economically attractive, the investor will have the motivation to "transfer the profits" in other countries with lower taxes transfer pricing issue

Transfer prices

= Practiced by companies that have branches in several countries (among which there are differences in taxation)

In transactions between the two branches (common for a transnational company) the headquarters may impose "transfer prices" / administered through which it tries to "artificially" increase profitability

Principles of identifying transfer pricing

The Comparable Uncontrolled Price - CUP = the product price charged between independent entities ;

The Resale Price Method = from the final price at which the subsidiary sells the product on the market, one decreases its profit margin to arrive at a reasonable import price;

The Cost Plus Method = to the costs of the exporting subsidiary one adds a profit margin to reach the export price;

The Profit Split Method = from the selling price of the importing subsidiary one detracts the costs of the exporting branch and the resulting profit is divided to 2 such that the export price is equal to the costs + 50 % of the profit;

The Transactional Net Margin Method = similar to the previous one, it is taken into consideration the profit margin of a comparable company;

The Global Formulary Apportionment of the total sales of a MNE minus the total of production costs and the profit thus obtained is divided by a certain formula between subsidiaries.

Other influence factors:

Consumer behavior

The existence of physical and human resources

Infrastructure

Strength of the external sector

Industrial Policy

Monetary and financial policy

LEGAL ENVIRONMENT

Legislative systems:

1. Common law system

2. Civil law system

3. The islamic system

LEGAL FACTORS

Laws regulating competitive behavior

Corruption laws

Consumer protection laws

Intellectual property laws

Marketing laws