Presented by:
Dr Connie Chui S. Chan
Week 5
Country Risks:
Economic, Political and Legal Systems
Live Zoom Activities
IBUS 1101 Global Business
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Different systems
• Economic
• Political
• Legal
• Implications for IB: opportunities and challenges
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Economic management
• VOC: liberal market economies (LME) and coordinated market economies (CME)
• Are Nordic European countries socialist? Some US politicians claim they are?
• High income, free trade, market economy, competitive, social safety net benefits, free
education, workers’ rights, health care, high taxes, social democratic parties
• Sanders: Sweden & Denmark “socialist” countries, Denmark was the American dream.
• Ask the Danes: capitalist !
• Danish government retorted Trump’s listing of Denmark as a failing socialist nation
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State-owned Enterprises
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• Subdivide European cluster
- Nordic
- Western/Central
- Include emerging markets
- Five clusters were identified
(Hortho, 2014)
Varieties of Capitalism
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• Witt & Redding (2013)
• Evolution of capitalism and non-market factors
• Financing (banks, shares, government support)
• Inter-firm relationships (business groups and family)
• Power balance: negotiation, laws (labour relations)
• 13 Asian business systems cannot be identified in VOC
• Exception Japan
VOC: application to Asian countries?
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(Witt, et al., 2018)
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Institutions
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• How well developed? According to whose standards?
• Historical background, economic, political, social development
• Institutional void?
• Institutional weakness: specify which aspects
• Formal and informal institutions
• Rules and regulations vs Relationships or both
• Do firms adapt incrementally adapt, converge, or hybridize?
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Emerging economies
• China and some states in Indian: substitute for ineffective formal institutions
(China: central and local officials, agencies, personal relations, industry networks)
• Russia: competition of stakeholder, shareholders, foreign investors
(powerful go-to local officials, bypass bureaucracy, oligarchs, people’s voice)
• Brazil: how to get around restrictive regulations
(Estrin & Prevezer, 2011) Italics are added by C.S. Chan
Informal Institutions
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Guidance from theories
• MNE responses?
• New institutional economics: focus on location, entry mode decisions, sequence of entries
• New-institutional (organizational sociology): isomorphic, imitate successful industry examples
• National business systems: pluralism, such as relations with labour
• Assumption: lower risks if home and host frameworks are similar
• Resources & capabilities of the firm: anticipate and act → proactive management
• (John & Lawton, 2018)
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Change
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• Multi-level analysis of interaction: within firm, inter-firm, industry (Lewin & Volberda, 1999)
• Rapidly changing environment of emerging / transition economies (Cuervo-Cazurra, 2015)
o keeping up with changes
o policy reversal is possible
• Firms coevolve with markets and home & host country institutions (Cantwell; Child)
• Pro-market reforms, restructuring, reversals (Chan & Pattnaik, 2021)
o Non-linear path
o Firms: responsive and /or proactive
o leverage institutions (policies) and develop own capabilities
Coevolutionary approach
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The Political Spectrum
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Where to place emerging markets?
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Types of political risks
• Systematic
• Procedural
• Distributive
• Catastrophic
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Financial anomalies Regulations that make it difficult for the firm to get credit or arrange overseas loans
Competing
perspectives
Host government policies (e.g. labour, human rights, environment) may pose public
relations problems for a foreign company
Unilateral breach
of contract
Host government repudiates contract negotiated with a foreign company or approves
a local firm’s for the same.
Tax discrimination A foreign company is saddled with a higher tax burden than a local competitor *
Restrictions on Profit
repatriation
Limit amount of profit a foreign company can remit to home office
*
Destructive gov
actions
Unilateral trade barriers, e.g. local content requirements and market interference
*
Harmful action
against people
Local employees of a foreign company are threatened
Expropriation Seizure of assets with little compensation. Resurgence of resource nationalism.
Civil strife,
insurrection, war
Military action that destroys a company’s local operations
(Daniels, et al, 2019)
Think and Share
• Is economic freedom correlated with a higher standard of living?
• Does economic freedom result in political freedom?
(Buckley, 2020)
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Democracy index
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EIU, 2022
Freedom
• While declining freedom increases political risks, it is not always as simple
• Democratization does not necessarily follow economic reforms
• Varieties of capitalism: liberal vs coordinated market economies
• Asian business systems are complex (different to western models)
• Development is not a linear process
• Definitions and practices differ across context
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Assessment of host country
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• Attractiveness of emerging markets:
o low cost production (labour)
o resource rich
o huge market
• How to balance risks and opportunities?
• Extreme cases (seizure and expropriation) are rare nowadays, more subtle
• Measurement of cost: economic gains but losses in other areas
• Is infrastructure well developed?
• Complex systems of emerging markets, e.g. China and India
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Measures and ranking
• What are the indicators?
• Reliability
• Comprehensive, representative?
• Relevance
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Ease of doing business
World Bank 2020 report, top economies for doing business
1. New Zealand
2. Singapore
3. Hong Kong SAR
4. Denmark
Can you name the countries that are most difficult to do business?
• Venezuela
• Eritrea
• Somalia
* Discontinued and replaced by Business Enabling Environment Report
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Ease of doing business (no updates)
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Dilemma faced by western MNEs
• Operating in EM and DC
• Refrain from “grease” payment:
o May stand to lose out to competitors who pay
o Not adapting to the local practices
o Fail to establish networks essential
• Pay bribes
o Violate home country laws (FCPA, extraterritoriality)
o Violate host country laws (formal)
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Unbundled Corruption
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Ang, 2020
Multi-dimensional approach
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Study of businesses in Vietnam
• MNEs identify key players that influence businesses using reports by consulting firms (country
& industry level information)
• Risk mitigation strategies:
o Manage alertness
o Portray good behavior (social activities such as technical institutes, health care, environmental sustainability)
o Active mediation and coalition (with influential actors, local institutions and multilateral organisations)
• Risk assessment practices: (1) from HQ to regional / global (2) local risk departments esp. emerging markets
• While MNEs gain local knowledge by collaborating with Vietnamese partners, there could be
negative impact on reputation as transition economy has yet to meet global quality standards.
• (Dang, Jasovska, and Rammal, 2020)
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Managing country risks
• Commitment of resources and sunk costs, could not simply exit: persevere?
• In-house expertise, guidelines and processes
• External consultants and experts
• Cultivate relations with government, parties, interest groups
• Networks: business, economic, social, international
• Hedging: identify alternatives, insurance, international organisations
• Challenge conventional view and anticipate possible changes
• Is the organisation well prepared and equipped to deal with risks
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Quiz
Legal system
The rule of law or the rule of man
• Which is common law?
• Which is civil law?
• Examples of countries that practice civil law
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Country Risk Arising from the Host Country laws
• Foreign investment laws affect FDI-based entry
Examples:
• Japan – The “large-scale retail store law” restricted foreigners from opening
warehouse-style stores to ensure smaller Japanese retailers remain viable.
• Mexico – Foreign oil companies cannot have 100% ownership of Mexican oil firms.
• Malaysia – firms wishing to invest in local businesses must obtain permission from
the Malaysian Industrial Development Authority, which screens proposed investments
to ensure they fit national policy goals.
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Country Risk Arising from the Host Country laws
• Foreign investment laws affect FDI-based entry
Examples:
• USA – Restricts inward investments seen to affect national security.
e.g. The U.S. Congress blocked Dubai Ports World from managing US ports.
• Australia FIRB rejected A$10 billion bids by Hong-Kong based Cheung Kong
Infrastructure and China’s State Grid Corporation for Ausgrid but subsequently
approved CSGC $4 billion takeover of Alinta.
• Extension of security: TikTok could not be used for business activities in the EU
and UK. US pressure to ban TikTok unless Chinese owners divest stakes.
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Country Risk Arising from the Host Country regulations (cont’d)
• Controls on operating forms and practices are laws and
regulations on how firms can conduct production, marketing,
and distribution activities.
Example:
In the telecommunications sector in China, the Chinese
government requires foreign investors to seek joint ventures
with local firms.
This ensures local control of the telecom industry and
Chinese firms could access foreign capital and technology.
Source: scmp
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Country Risk Arising from the Host Country laws (cont’d)
• Marketing and distribution laws
regulate practices in advertising, promotion, and distribution
Examples:
• Finland, France, Norway, and New Zealand prohibit cigarette
advertising on television.
• Canada and other countries cap prices in the pharmaceutical and
other industries.
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Country Risk Arising from the Host Country (cont’d)
• Laws on income repatriation limit the amount of net income
or dividends that firms can bring back to the home country.
• Environmental laws aim to preserve natural resources,
combat pollution, and ensure safety.
Example:
In Germany, firms are responsible for recycling product packaging.
The same MNEs might take advantage of more relax standards in developing countries
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Home country laws
• Refer to Canvas 5.3
• Extraterritoriality
• Foreign Corrupt Practices Act
• Accounting and financial reporting laws: assets, costs, transparency
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Geopolitical factors
• More challenging with rising tensions in various regions
• Unresolved conflicts and continuing wars
• Often multiple countries are involved
• Research firm’s public statements and global strategy
• Potential targets: location and business partners (sources, supply, market)
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Summary
• Target countries could be complex, assessment entails multiple levels of analysis
• Pre-entry scanning, evaluation, preparation
• What are the options / alternatives
• Holistic approach: categories are useful but be aware of limitations
• Formal and informal institutions
• Dynamic environment
• Ongoing analysis post entry to manage emerging risks
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Group assignment
• Contact group members
• Start thinking of the research areas: firm, target country, strategy
• Report to tutor to lock in the topic asap
• Prepare to brief tutor and class in Week 7 class (3 mins per group)
• Post on Canvas Discussions if you have questions on the guidelines
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Lecture
Week 5 Entry Strategy
Tutorial
Prework, case discussions, class activities
Reminder
Quiz 2 in Week 6
• keep up with course contents, announcements, weekly module and readings
• check Canvas pages, calendar and email regularly
• students who need help to improve assessment results, please reach out
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Questions?
Email: Connie
chui.chan@sydney.edu.au
Post on Discussions
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