Chapter 9

Political and Economic

Factors Affecting International
Business
Types of Political Systems

1. Democracy - government for and by the
people
- Elected decide on the rules that will govern
the people
- individuals can own property and run businesses
- free press and freedom of speech
- capitalist economy, market allocates available
resources



9.1 The Political Process: Governments
Role in International Trade

Types of Political Systems (cont.)

2. Totalitarian Systems - centralize power and
often use the military to control the state
- single party governments or dictatorships
- no elected representatives in government
- command economy, govt allocates available
resources
Examples: North Korea, Cuba


9.1 The Political Process: Governments
Role in International Trade
Types of Political Systems (cont.)

3. Mixed Economy - purely democratic or
totalitarian political system is theoretical; most
countries show characteristics of both

9.1 The Political Process: Governments
Role in International Trade
Political Interdependence countries start to
feel pressure to change their political, economic,
and cultural practices
Example many countries refused to trade
with South Africa because of the policy of
apartheid imposed by the white minority on
the Blacks, Indians, and people of mixed race
of that country. After years of pressure, this
policy was abandoned by the government

9.1 The Political Process: Governments
Role in International Trade
Trade War - governments act aggressively in
international markets and other forums to
promote their own countries trading interests
Example early 2001, the Canadian
Government imposed a ban on the importation
of beef products from Brazil.
- Affected by this supermarkets and smaller
grocery store lost the income from beef
products that they might have been able to
sell, and transportation companies lost
business

9.1 The Political Process: Governments
Role in International Trade
Economic Imperialism exploitation of
developing countries by more developed
countries
- Often referred to Coca-Colonization - This
happens when a large company can exert
considerable economic and cultural power over
local inhabitants.
- This can have a negative effect on the cultural
identity of a nation

9.1 The Political Process: Governments
Role in International Trade
Economic Systems
include all the factors and the rules and
regulations involving production and
consumption of goods/services
- systems allows a country to decide
what to produce, how to produce, and for
whom to produce
- Such systems include natural resources
(land), labour, capital (money) and
management


9.3 Economic Factors Related to
International Business

9.3 Economic Factors Related to
International Business
Three most common economic systems:

1. Market Economy
2. Centrally Planned (command)
Economy
3. Mixed Economy

Market Economy individual companies
and consumers make the decisions about
what, how, and whom goods and services are
produced
Forces of supply and demand control market
economies
Law of Supply states as price of a product
increases, producers will be willing to produce
more of that product
Law of Demand states as price of a produce
increase, consumers demand less of the
product

9.3 Economic Factors Related to
International Business
Centrally Planned (command) Economies
government regulates the amount, distribution,
and price of goods and services
- Society is considered before individual needs
- State controls prices, wages, production quotas,
and distribution of raw material
- Guaranteed basic standard of living, health
benefits, and education

Examples: North Korea and Cuba


9.3 Economic Factors Related to
International Business
9.3 Economic Factors Related to
International Business
Centrally Planned (command)
Economies (cont.)
China once had a socialist, planned economy
where the government (one party) controlled
and owned all the means and methods of
production. It is now near a market economy
after privatization of most of the state owned
enterprises and opening up to western
countries. For example, peasants now have
their own farms, foreign businesses are
allowed to set up in China and so on.

Mixed Economy combines government
involvement and private ownership of
businesses
Canada is considered a mixed economy
for the following reasons:
- Canadian Government has had to play a
major role in important industries
(transportation, health care, and
communications)

9.3 Economic Factors Related to
International Business
9.4 Managing International Financial Risks
Currency Risk
Exchange Rate rate in which a nations
currency can be exchanged for other
currencies or commodities
Floating rate a rate that tends to
fluctuate or change over time.


9.4 Managing International Financial Risks
Currency Devaluation reduction by a
government of the value of its currency
relative to currencies of other nations

Currency Revaluation a country adjusts
the value of its currency upward

Pros and Cons of Currency Devaluation
and Revaluation