Week 3 Flashcards
(32 cards)
what is country risk
- political risk
Exposure to potential loss or adverse effects on company operations and profitability caused by developments in a country’s political and/or legal environments.
Dimensions of country risk
Cross cultural Risk
Country Risk
Currency (financial) Risk
Commercial Risk
Dimensions of country risk (elements that can have an impact)
- harmful or unstable political system
- laws and regulations unfavorable to foreign firms
- inadequate or underdeveloped legal system
- bureaucracy and red tape
- corruption and other ethical blunders
- government intervention, protectionism and barriers to trade and investment
- mismanagement or failure of the national economy
Country Risk produced by political systems
- Government takeover of corporate assets
- Ruptures in trade realtions / creeping expropriation
Country Risk produced by political systems:
Government takeover of corporate assets
confiscation (Beschlagnahmung)
- seizure of corporate assets withouth compensation
expropriation (Enteignung)
- asset seizure with compensation
nationalization (Verstaatlichung)
- takeover of an entire industry, with or without compensation
Country Risk produced by political systems: creeping expropriation
- the most common expropriation today
- the government gradually modifies regulations and laws after foreig MNEs have made big local investments in property and plants
The principal functions of political systems are
- provide protection from external threats
- ensure stability based on laws
- govern the allocation of valued resources among the members of a sociatey
- define how society’s members interact with each other
two axes to map political systems
totalitarianism - democracy
socialism - liberalism
How are political decisions taken?
Totalitarianism vs. democracy
Totalitarianism
The State – often one strong leader/party – seeks to control all aspects of life. Through one-party system, secret police, state propaganda, regulation of free discussion and terror tactics.
Democracy
The power lays mainly with the citizens. They have the right to choose their government and may even vote on different public referendums.
How should wealth be distributed?
Socialism vs. Liberalism
Socialism
Capital and wealth should be vested in the state. The collective welfare of the people is seen to overweight the welfare of the individual.
Liberalism
The private property rights are essential and are protected. The government only performs essential functions that serve all citizens. The ideas of capitalism are predominant.
Examples for Totalitarianism and socialism
Democratic people’s republic of korea (DPRK)
Examples for Totalitarianism and liberalism
United Arab Emirates (UAE)
Expamples for Liberalism and Democracy
United States of America (UA)
Examples for Democracy and Socialism
Kingodom of Sweden
Economic Freedom
- Size of Government:
- state involvement into free market – transfers, subsidies, tax, state-owned companies - Legal System and Property Rights:
- legal certainty – independent institutions, corruption, protection of property rights - Sound Money:
- money growth, inflation, freedom to own foreign currency - Freedom to trade internationally:
- the freer the better – tariffs, regulatory trade barriers, free movement of money/people - Regulation:
- the lesser the better - credit market, labor market, business regulation
Economic liberty as defined by the Fraser Institute is also a driver for
GDP per Capita
Income of the poorest
Movements and transitions from one system to another
changes within the same system for political reasons
nationalization for political reasons (change from one system to another)
- Communist countries from market driven economies to centrally organized economies, ex. Russia, Poland
privatization for political reasons (change from one system to another)
- Communist countries from a centrally determined economy to a market driven economy
changes within the same system for economic reasons
- Some EU countries are privatizing state-owned companies
Three countries from Soviet Union that decided to join NATO as well as the EU
- Estonia
- Latvia
- Lithuania
The three major groups of legal systems of the world today consist of :
Continental legal system (civil law)
Anglo-American legal system (common law)
Religious legal systems (Sharia, Halakha, Canon)
mixed legal system
- two or more legal systems operating together
Examples for: civil law common law muslim law religious law mixed systems
civil law
- Europe
- south america
- russia
- japan
- south korea
common law
- North america (US)
- Australia (Oceania)
- canada
- rieland
- new zeeland
- UK
muslim law
- Middle east
religious law
- north africa
- afghanistan
- maritania
- pakistan (Muslim law and common law)
- sudan
mixed systems
- bangladesh
- india
- indonesia
- israel
- malaysia
- philippines
Common law decision by
Case law
- Bases on tradition, previous cases, previous interpretation legislation and past rulings
Civil law decision by
Code law
- Bases on the Roman and Napoleonic Code. Laws are clearly written and accessible. All-including system of law that has been codified.
In order to avoid legal prosecution companies have to comply with different law systems, the one in the home and the one in the foreign country. This opens to floor different problems:
No clear regulation how a contract should be drafted?
To understand both legal systems might be very complicated and their combination even more complex.
The two legal systems might even contradict each other. This leaves the company with the choice in which of the two countries it wants to break the law.
Types of country risks
- Government takeover of corporate assets
- confiscation
- expropriation
- nationalization - Ruptures in Trade relations
- embargoes/Sanctions
- change in trade relations - Boycotts against firms or nations
- War & Terrorism
- Host-Country Legal Environment
- 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 - Country Risk arising from the host country
- extraterritoriality
- foreig corrupt practices act
- accounting and reporting laws
- transparency in financiao reporting
