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Answer to #1
War, insurrection, and revolution pose big problems for business operations. While such events usually do not affect companies directly, their indirect effects can be disastrous. For example, violent conflict among drug cartels and security services along the U.S.-Mexico border has led some firms and financiers to withdraw their investments from Mexico because of perceived heightened risks and political instability. In order to minimize losses from violent acts, firms can purchase risk insurance.
Answer to #2
The adoption of free markets worldwide has helped to drive market globalization by helping to integrate former command economies into the global economy. Examples include market liberalization in the Soviet Union, China, Eastern Europe, India, and many countries of East Asia.
The collapse of the Soviet Union's economy in 1989, the tearing down of the Berlin Wall that same year, and China's free-market reforms smoothed the integration of former command economies into the global economy. Numerous East Asian economies, stretching from South Korea to Malaysia, Indonesia, and India had already embarked on ambitious market-based reforms. These events opened roughly one-third of the world to freer international trade and investment.
Answer to #3
Country risk is exposure to potential loss or adverse effects on company operations and profitability caused by developments in a country's political and/or legal environments. Also referred to as political risk, it is one of four major types of international business risks. While the immediate cause of country risk is a political or legal factor, underlying such factors may be economic, social, or technological developments.
A political system is a set of formal institutions that constitute a government. It includes legislative bodies, political parties, lobbying groups, and trade unions. Constituents are the people and organizations that support the political system and receive government resources.
The principal functions of a political system are to provide protection from external threats, establish stability based on laws, and govern the allocation of valued resources among the members of a society. A political system also defines how a society's groups interact with each other. Each country's political system is unique to its historical, economic, and cultural context. Political systems are also constantly evolving in response to constituent demands and the evolution of the national and international environment.
A legal system is a system for interpreting and enforcing laws, regulations, and rules that establish norms of conduct. A legal system incorporates institutions and procedures for ensuring order and resolving disputes in commercial activities, as well as for taxing economic output and protecting intellectual property and other company assets.
Political and legal systems are dynamic and interdependentchanges in one affect the other. Adverse developments in either system can give rise to country risk. These developments can result from the installation of a new government, shifting values or priorities in political parties, initiatives developed by special interest groups, and the creation of new laws or regulations. Exhibit 5.2 identifies the aspects of political and legal systems that contribute to country risk.
Country risk is always present, but its nature and intensity vary over time and between countries.
Answer to #4
Governments seize corporate assets in two major ways: confiscation and expropriation. Confiscation refers to the seizure of foreign assets without compensation.
Nationalization generally refers to government takeover of an entire industry, with or without compensation. In 2006, the government of Bolivia nationalized much of the oil and gas industry in that country. Nationalization occurs in advanced economies as well. Following the recent global financial crisis, the federal government of the Netherlands nationalized part of the financial-services company Fortis NV, and Britain nationalized the Royal Bank of Scotland.
Proactive environmental scanning can mitigate the risks of these types of seizure. Anticipating country risk requires advance research. Initially, managers develop a comprehensive understanding of the political and legal environment in target countries. They then engage in scanning to assess potential risks and threats to the firm.
One of the best sources of intelligence in the scanning process is employees working in the host country. They are knowledgeable about evolving events and can evaluate them in the context of local history, culture, and politics. Once the firm has researched the political climate and contingencies of the target environment, it develops and implements strategies to facilitate effective management of relations with policy makers and other helpful contacts in the host country. The firm then takes steps to minimize its exposure to country risks that threaten its performance.
Answer to #5
In addition to profit-seeking focal firms in international business, there are numerous non-profit organizations that conduct cross-border activities. These include charitable groups and non-governmental organizations (NGOs). Nonprofit organizations pursue special causes through their international activities. They may serve as advocates for the arts, education, politics, religion, or research. They operate internationally either to conduct their activities or raise funds.
Examples of non-profit organizations include the Bill and Melinda Gates Foundation and the British Wellcome Trust, which support health and educational initiatives. CARE is an international non-profit organization dedicated to reducing poverty.
Answer to #6
In terms of political and legal systems, managers must be able to navigate difficult regulations and practices and avoid unethical or questionable conduct. At the same time, the political and legal context can present opportunities. Preferential subsidies, government incentives, and protection from competition reduce business costs and influence strategic decision making. Many governments encourage domestic investment from foreign MNEs by offering tax holidays and cash incentives to employ local workers.
On the other hand, political or legislative actions can harm business interests:
-Laws and regulations unfavorable to foreign firms
-Inadequate or underdeveloped legal system
-Bureaucracy and red tape
-Corruption and other ethical issues
-Government intervention, protectionism, and barriers to trade and investment
-Mismanagement or failure of the national economy
Answer to #7
Cross-cultural risk is posed by differences in language, lifestyles, mindsets, customs, and religion. Values unique to a culture tend to be long-lasting and transmitted from one generation to the next. These values influence the mindset and work style of employees and the shopping patterns of buyers. Foreign customer characteristics differ significantly from those of buyers in the home market.
Language is a window on people's value systems and living conditions. Miscommunication due to cultural differences gives rise to inappropriate business strategies and ineffective relations with customers.
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