Economic Systems

Countries economic system deals with three issues:

What goods and services should be produced?How should the goods and services be produced?For whom should these goods and services be produced?

Systems are categorized by the ownership of resources and the governments involvement

Types of Economic Systems

Command/Centrally PlannedMarketMixed

Command/Centrally Planned Economies

All activities of the economy are planned by the governmentThis includes what is produced, the quantity of goods produced, and the prices at which they are sold.This is often called a communist economic system. Cuba and North Korea are examples

Over past 20 years these have declined

Failed to create economic valueFailed to provide incentivesFailed to achieve growthFailed to satisfy consumer needs• Vending Machine• Fashion• Butcher Shop in Warsaw 1989• Queue in Wroclaw, Poland

Market Economy

In a market economy, decisions are made by consumers and companies about what, how, and for who items are producedProperty is privately ownedThis is also known as a capitalist systemAn example of a market economy is the United States

Mixed Economy

In a mixed economy, some parts of the economy are privately owned and some are owned by the governmentTypically the government steps in for companies who are considered vital to the country or necessary for the public good (ex: health care, transportation)

This is often referred to as a socialist systemExamples of mixed economies include France, Italy and Sweden

Relationship to Political Systems

Totalitarian political systems tend to have a communist/command economyDemocratic political systems tend to have a capitalist/market economy

Privatization

The trend today is toward market economiesThe process of transferring government owned and operated entities to private individuals is called “privatization”

Peru’s PrivatizationPeru wanted to involve its citizens, particularly low-income peopleIn November 1994, the government launched a program designed to involve citizens in auctions of shares of formerly state-owned enterprises.With almost 50 percent of the population below the poverty line, 3,000 people bought out all the telephone company shares available in the fist auction in less than three hours.

In the second auction, 6,600 investors -- many of them lower-income -- bought out all available shares in 45 minutes. By 1994 18,500 people had participated in the three auctions held to date. The government aimed to involve half a million by 2000.

Results

Highest real economic growth rate in the world in 1995. Poverty rate had dropped from 53.6 percent to 45.8 percent by 1995Major tax and trade reforms have been enacted and the privatization program has sold off 51 state-owned enterprises, garnering $3.6 billion.

Economic Risk

Likelihood that events, including economic mismanagement, will cause drastic changes in country's business environment that adversely affect the profit and other goals of a business enterprise

Types of Economic Risks

Exchange controlsTax impositionsMinimum wage changesInflationLoan default

3 bases for the majority of legal systems around the world

1. Common law2. Code/civil law3. Theocratic law

Common law

Bases itself on tradition, past practices and legal precedents set by courts through interpretation of the statutes, legal legislation and past rulings

Code/Civil Law

Code law is based on an all-inclusive system of written rules. There are three parts of rules: commercial, civil and criminal

Theocratic Law

This system is based religious beliefsEx: Islamic law is based on an interpretation of the KoranAn example of how Islamic Law differs from American law is that Islamic law prohibit the charging of interest

Legal DisputesThere are three types of legal disputes:

Between governmentsBetween a government and a companyBetween two companies

First type can be handled by the World Court

International Court of Justice

Judicial branch of the United NationsLocated at the Peace PalaceHears disputes between governments and gives advisory opinions about issues to international agencies http://www.icj-cij.org/

International Dispute between companies

Jurisdiction determined in three ways:

1. Is there a jurisdictional clause?2. Where was the contract entered

into?3. Where were the provisions of the

contract performed?

Jurisdictional Clause

Statement in business that specifies whose legal system or laws will apply to a dispute.“That the parties in question hereby agree that the agreement is made in Colorado, USA, and that any questions regarding this agreement shall be governed by the law of that state, Colorado, USA.”

Dealing with Disputes

Conciliation/MediationArbitrationLitigation

Conciliation

Ask a non-biased third party to step in and recommend what should be done. It is nonbinding, and can be either formal or informal.Recommended for disputes involving the Chinese because it is less threatening than arbitration.

Arbitration

Preferred manner of dealing with disputes internationallyBoth parties select a third person to make a decision that will be honored by allFormal arbitration groups exist such as the American Arbitration Association, or International Chamber of Commerce

Arbitration clauses should be written into business contracts to make sure that both parties agree to follow the decision made by arbitrators.Arbitration clauses are recognized by courts and over 80 countries have signed an agreement to recognize arbitration awards.

Litigation

Least preferred method of dealing with international disputes.Excessive costs, time delays and may create a poor image for all parties involved.Fair juries and collecting awards can also be an issue.

Chinese recommended settlement process

Informal negotiationConciliationArbitrationLitigation

Intellectual Property

Intellectual property refers to works of the mind such as ideas, art, music. It can also be products such as a chemical formula or computer software.This is becoming one of the hottest issues in international business.

Types of intellectual property

Patent – exclusive rights to a new product or process for an inventorTrademark – words or symbols that are registered by a companyCopyright – legal rights to a work by authors, composers, playwrights, artists or publishers

Examples of famous protected works and their worth in millions

1. Coca-Cola $68,734 2. IBM $60,211 3. Microsoft $56,647 4. GE $47,777 5. Nokia $34,864 6. McDonald's $32,275

Brand values courtesy of InterbrandSee the full report at

http://www.interbrand.com/best_global_brands_intro.aspx

Protection

Paris Convention of the Protection of Industrial Property, Madrid Agreement, and others have tried to make protection easier for international registration

Problems in Intellectual Property

In the U.S., ownership is established by prior use due to our common law systemMany code-law countries use a registration system, where the first company to register is the one who has rights

Piracy and counterfeit items are also a large problem

In a survey conducted by the IACC, Fortune 500 companies reported that they spend an average of between $2 - $4 million per year to combat counterfeiting. Some reported spending up to $10 million.

IACC – International Anti-Counterfeiting Coalition

The computer software industry as a whole is losing between $12 - $16 billion per year because of rampant piracy and counterfeiting. This amounts to more than 40 percent of all software industry revenues. In some countries, more than 90 percent of computer software are illegitimate copies.

Illegal videotaped copies of newly released films are often available for sale on the street even before the movies appear on the big screen. A recent film which cost a studio in excess of $100 million to produce, could be purchased on the street for a mere $10.00 before it was released in theatres.

You TubeTrademark counterfeiting robs the U.S. of $287 billion annually. It is a highly profitable tax-free cash business and it's lining the pockets of the same criminals involved in murder, drug trafficking, gun running and extortion.

City of New York Office of ComptrollerNovember 2004 Report on Counterfeiting in

NYC

What's more, incidents of dangerous fake products turning up in the U.S. have spiked since the mid-1990s. Authorities found counterfeit baby formula at retail stores in 16 states, bacteria in fake shampoo and the FAA estimates that 520,000 counterfeit aircraft parts are installed on airplanes each year.

Marketing Laws

Countries have different laws relating to promotion, product development, pricing, labeling and distributionExamples:

In Germany, comparisons made between products must be provenIn Canada, claims can not be misleading

Germany’s green dot program affects product packaging because all packaging must be accepted back by the manufacturer, distributor or retailer.

Companies must check each country’s laws

Contract Law Issues

Contract law varies widely between countriesCivil law countries tend to be much shorter and less specificCommon law countries tend to be much more detailed

Product Safety and Liability

Safety standards vary greatlyLiability laws also change by country as to how much a company can be held responsible for product problems

American laws which follow businesspeople

Foreign Corrupt Practices ActNational Security Laws

i.e. Patriot Act

Antitrust Laws

Foreign Corrupt Practices Act

Applies to any individual, firm or representative of an organizationFCPA prohibits paying, offering, or promising to pay anything of value to any foreign official, political party or candidate for political office In order to assist firm in obtaining or retaining business http://www.pbs.org/frontlineworld/stories/bribe/2009/02/at-siemens-bribery-was-just-a-line-item.html

FCPA enforcement actions filed by DOJ and the SEC

Source: Gibson Dunn at http://www.gibsondunn.com/Publications/Pages/2008Year-EndFCPAUpdate.aspx 10/14/2009

Antitrust Regulations

Microsoft antitrust issues1999 U.S. Justice Dept charge that they are monopoly over Windows operating system (self policing)1999 European Union charged unfair practices for using Windows to control media players ($1.6 billion fine)

2004 Japan's Fair Trade Commission issued cease-and-desist order for anti-competitive behavior. 2009 European Union charges anti-competitive practices

Legal Risk

Likelihood that trading partner will opportunistically break a contract or expropriate intellectual property rights

Political, Legal and Econ Impacts

Systems in place impact economic developmentGross National Income per head of population (GNI)Nation Master GNI chart

Broader concept is Human Development Index (HDI) Life expectancy, educational attainment, average income adequate to meet basic needschart

Major Themes from text

Innovation and entrepreneurship are engines of long-run economic growthMarket economies have greater incentives for innovation and entrepreneurshipStrong legal protection of property rights is conducive to economic growth

Democratic governments seem more conducive to long-term economic growth than dictatorshipsTrends has been toward democracy and toward market economy