AOF Business in a Global EconomyLesson 4 Political and Economic Systems
Student Resource 4.1
Information Sheet: Country ProfilingStudent Name:_______________________________________________________ Date:___________
Directions: Compare the economic indicators of Mexico and Canada. Circle the three indicators that most strongly influence your decision about which country promises more opportunities for a manufacturing company. Make notes at the bottom of the page about the reasons you chose your indicators, and be ready to share your thoughts with your classmates. Note that all dollar amounts are expressed in US dollars.
Indicator Mexico Canada
Unemployment rate 5.0% 6.9%Minimum wage Varies by zone:
$4.72–$4.98/hourVaries by province:$9.33–$10.31/hour
Inflation rate 3.6% 1.2%Population 118,395.054 33,476,688Median age 27.7 40.6Labor force 78,200,000 18,890,000
GDP (purchasing power parity) $1.748 trillion $1.446 trillionGDP per capita $15,363 $42,317
# of steps to start a new business (e.g., for licenses or
AOF Business in a Global EconomyLesson 4 Political and Economic Systems
Student Resource 4.3
Reading: A Tale of Two Koreas
A Brief History of North and South KoreaIf you have been listening to the news, you know that North and South Korea are in conflict with each other. They often threaten to go to war. How did this happen? Why is Korea split in two? Korea was one independent country until 1910, when it came under the control of Japan. After the United States defeated Japan in World War II, Korea once again became independent. However, this was not a period of peace. Instead, two Koreas began to take shape. The United States administered the southern part of the country while the Soviet Union controlled the northern part. In 1948, both sides formed interim governments within their areas of control. But in 1950, the Korean War began when northern Korean forces crossed into southern Korea. The United States and many other countries came to the south’s defense. The war ended in 1953 with an armistice, which is an agreement to stop fighting. It isn’t the same as signing a formal peace treaty. After the armistice, South Korea and North Korea built themselves up as two separate countries.
The Politics of North and South KoreaPolitically, the two countries are on opposite sides of the spectrum. South Korea is a constitutional republic: its government is based on a constitution. There are many political parties in South Korea and they compete in open elections. North Korea, on the other hand, is a totalitarian state. It is under the control of a nonelected absolute ruler. It has only one political party and it controls the armed forces, the secret police, and all parts of the government.
Two Very Different EconomiesNot surprisingly, the two very different types of government, with their very different ideologies about economic life and almost everything else, have led to very different economies. The result has been a very wide gap in the levels of economic development. After the Korean War, both countries were devastated. Both had levels of income per person comparable to the poorer parts of Africa today. Yet since that time, South Korea has expanded to be the 12th biggest economy in the world. North Korea’s economy, on the other hand, remained stuck at a low level of productivity and income, and has even declined since the 1970s. Its gross domestic product is now ranked 99th in the world. What could explain this wide disparity?
South Korea has few natural resources and is relatively small. Yet even without much land or many natural resources, it has become a major and highly productive economy. It is a market economy. Most business enterprises are privately owned, though the government does play a major role in managing the economy. There’s a name for the astonishingly fast economic growth of the country’s economy between 1961 and 1997. It’s called the Miracle on the Han River. (The Han River runs through the capital city, Seoul.) The International Monetary Fund, which monitors the global economy, lists South Korea as an advanced country, meaning it is one of the most highly developed countries in the world.
One of the keys to South Korea’s success is that it has a knowledge economy. The economy is based primarily on industries that rely on intensive technological know-how and information. This is true even for heavy industries (like shipbuilding) that involve a lot of steel alongside the specialized knowledge. High-tech manufacturing and engineering play a central role in the economy. South Korea is home to LG and Samsung, leading electronics manufacturers whose activities are global. Hyundai, one of the biggest automakers in the world, is headquartered in Seoul. South Korea also has some of the biggest shipbuilders and heavy-industry companies in the world. To achieve this success, the country has developed one of the world’s best education systems, especially in the areas of math and science.
AOF Business in a Global EconomyLesson 4 Political and Economic Systems
The Role of Government in South Korea Government has played a central role in helping the economy to grow. It collaborates with private enterprise. In the early stages of recovering from the war, the government’s trade policies were quite protectionist. It limited imports into the country. The government supported certain industries it saw as vital to its economic strategy. The government’s attitude changed once South Korean companies such as LG, Samsung, and Hyundai became established as successful multinationals. Now the South Korean government is more concerned with getting market access for them worldwide and much less concerned with restricting imports. It therefore engaged in a major way with international free-trade negotiations such as those of GATT and then WTO. It has contributed greatly to more free trade globally. In the process, it greatly reduced its own barriers to imports and market entry by foreign companies.
South Korea’s government has been very concerned with macroeconomic policy. For example, government policy, as well as local culture and tradition, encourages people to build up their savings and discourages heavy use of consumer credit.
South Korea is an open society. It is relatively decentralized, although a few giant South Korean business corporations play a big role in the society. Its citizens have full property rights.
The Role of Government in North KoreaIn contrast, North Korea’s economy, like its government, is completely centralized. All manufacturing and most trading businesses are owned and controlled by the government. North Korea has a command economy. All businesses are owned by the government and run like an army, with a hierarchy of command and control. North Koreans have almost no property rights, and virtually all property belongs to the state.
Unlike South Korea, whose open society and economy are internationally connected and highly successful in the global marketplace, North Korea has an isolationist policy towards the outside world. Its interactions with other countries are very limited. While North Korea is a member of some international organizations, notably the United Nations, there is generally very little cooperation with other countries. North Korea does not have much international trade, either from exports or imports. Officially, North Korea claims that it strives to be completely self-reliant, but it has not fully succeeded in this. There is a chronic shortage of food. Famine has driven North Korea more than once to seek food aid on a large scale from other countries (including the United States). The Fund for Peace, a not-for-profit research organization, lists North Korea as a failed state, meaning that in their opinion, North Korea is in complete disarray, both politically and socially.
Despite the fact that North Korea does have some natural resources (including iron, zinc, coal, and productive fishing grounds), its closed-off economy has greatly limited any opportunities for growth.
The Soviet Union collapsed in the 1990s, which dealt a major blow to North Korea’s economy. The Soviet Union had been one of North Korea’s two main trading partners, along with China, and supplied the North Korea with a large amount of food. Without this help North Korea suffered a terrible famine, partly as a result of its own mismanagement of agriculture but also because of the disruption of former trading relationships. Today, North Korea still has trouble providing basic nourishment for its citizens, and there is evidence that a large proportion, possibly even a majority, of its citizens suffer from malnutrition. Making matters even worse, in 1995, the North Korean government adopted what it calls a military-first policy. The military gets what it needs first, and whatever is left goes to the general population. This policy makes it harder for citizens to get food and for the economy to develop.
North Korea and South Korea began building themselves up, seeking to become modern countries, at the same time and under similar general conditions. But whereas South Korea has become a major economic power, North Korea is unable to provide most of its citizens with their basic needs. Clearly, economic development and success in the global marketplace has much to do with a country’s political system, economic system, and specific policies.
AOF Business in a Global EconomyLesson 4 Political and Economic Systems
Student Resource 4.4
Reading: Political and Economic Systems
In today’s global economy, a company can choose to do business in many different countries in the world. But there are many factors to consider when deciding on which countries to enter.
Each market in each country will have its own advantages and disadvantages. How much will the business need to pay in taxes? Will the host country’s legal system protect a business’s new ideas or artistic creations? What about education? If a firm wants to expand, how can it ensure it will be in a country with educated workers? Will it make sense economically to expand there? What is the risk of nationalization or competition from state-owned enterprises? Are there significant regulations that could affect the operations or cost of doing business in that country?
In this presentation, we’ll look at ways that a business can determine whether a country is a good fit by looking at risk factors in a country’s economic and political systems.
AOF Business in a Global EconomyLesson 4 Political and Economic Systems
Businesses have ways to analyze their chances for success in a given country. This process is called risk analysis. Firms look at the social, political, technological, and economic aspects of a country to assess the risks and potential rewards of doing business there.
This examination helps a firm to decide the right time to enter a market and the most effective way to do so. Some of the many questions firms consider include:
• Can the host country provide the employees that are needed, with the right skill set?
• Does the host country have reliable, affordable electric power?
• Can the host country provide good work space and other elements needed to set up shop successfully?
• Does it have the infrastructure (e.g., air, rail, and road transport) needed by the business?
• What laws and regulations come into play?
A company weighs all these factors in order to decide if entering the market will be a smart move, ensuring profit and providing benefits to both the home and host countries.
AOF Business in a Global EconomyLesson 4 Political and Economic Systems
The politics of a country greatly influence its attitudes toward business. Firms considering international expansion face three types of political risk.
Ownership risks are those that can affect the ownership of a business or its assets, including loss of business property. Government policies or political instability can sometimes cause a business property to be confiscated, sold, or even destroyed. Ownership risk can also be defined to include loss of life resulting from violent political conflict or other violence. Multinational companies look for politically stable countries to do business in to minimize ownership risk. Foreign-owned businesses or assets have been seized at times (including in Venezuela and Iran), sometimes with compensation, sometimes without.
AOF Business in a Global EconomyLesson 4 Political and Economic Systems
Operating risks include interference in the day-to-day operations of a business abroad. Essentially, they are risks due to human error. They include any issue that keeps a business from functioning efficiently. Examples of operational risk that are politically related are worker’s strikes.
Other operating risks are not politically related. If your sales force is ineffective, if your equipment is outdated, or if your IT department hasn’t kept your data protected—these are all operating risks because they are caused by people.
AOF Business in a Global EconomyLesson 4 Political and Economic Systems
Transfer risks occur when products or funds are transferred from one country to another. The laws of the host country might be unfavorable to foreign currency transactions, for example. Or the host country might have strict price controls. Multinational corporations can lose a lot of money in these situations.
Laws and regulations can change overnight, wreaking havoc for an international business. For example, let’s say Don is an American business owner who sells music products to countries in eastern Europe. Just before he completes an important deal, the bank in one of these countries considers changing its regulations. It might require Don to keep his funds in the nation’s bank for six months before he can transfer them to a bank in the United States. If he can’t get his money out, Don might not be able to complete his deal, in which case he would face a huge financial loss.
International businesses have to pay close attention to changes in laws and regulations in the countries they do business with. They have to be prepared for transfer risks.
AOF Business in a Global EconomyLesson 4 Political and Economic Systems
Firms hire attorneys to protect their businesses for many reasons. Lawyers must know the different ways contracts are drawn up and enforced in different countries, for example. Lawyers also help to protect property. In the legal world, property includes land, structures, equipment, and businesses. It also includes certain kinds of knowledge or inventions known as intellectual property. Intellectual property consists of ideas, designs, methods or knowledge that have legal protection such as patents, copyrights, or trademarks. It is important to know how a country’s government deals with intellectual property.
Some businesses create nonphysical things, such as new ideas. For instance, an engineer might develop a new, cheaper way to produce solar panels. Companies want to protect that idea from being used by other companies and maintain some control over their creations.
AOF Business in a Global EconomyLesson 4 Political and Economic Systems
Property rights can be violated in many ways, and lawyers are critical in these situations. There is piracy, which is the illegal copying of films, music, and/or software. Another violation is manufacturing counterfeit consumer goods, such as fake designer clothing or, more dangerously, fake medical drugs. Using someone else’s know-how, design, or brand is another violation. A government’s laws and the enforcement of these laws may be lax or strict. Some firms avoid countries that do not enforce piracy laws.
Some governments may even intentionally ignore the theft of intellectual property from multinational companies by local companies. This is a short-sighted policy. It discourages multinational companies from expanding to countries with such policies. Also, some countries encourage investment from foreign companies to gain a skilled workforce. Then they later discourage foreign investment to keep local markets controlled by domestic companies (e.g., China).
AOF Business in a Global EconomyLesson 4 Political and Economic Systems
A country's natural resources can greatly affect its business potential. For instance, a country with access to the ocean has the ability to ship goods by sea that a landlocked country, obviously, does not have. And a country that has enough fertile land and good weather is usually able to produce enough food for its inhabitants. Also, a country that has ample energy resources can fuel a robust manufacturing sector.
The education system is another key determinant of economic status. Is there a public education system that all children can attend to learn basics such as reading and math? Is it provided free of charge to all? Are there many adults who are illiterate and unskilled? In general, educated workers are more productive and better able to perform their tasks. Countries like Andorra put a certain percentage of its GDP towards education, guaranteeing that it is accessible to every citizen.
AOF Business in a Global EconomyLesson 4 Political and Economic Systems
In a global economy, companies from different countries compete. But businesses inside a country can be protected from outside competition by putting up trade barriers. Trade barriers have been reduced recently. They are still in use because they may safeguard some jobs, but they also mean less choice and higher prices for consumers.
Other ways governments try to give a competitive edge to domestic companies include:
• Tariffs: taxes levied on imported goods
• Quotas: limits on the quantity of goods allowed to be imported into a country
• Subsidies: government contributions through tax breaks and price controls that help local industries
• Embargoes: bans on trade with certain countries. These are rare, and when they exist, it is usually for strategic or military/national security reasons.
Many governments have reduced their protectionist measures, through trade treaties like NAFTA (the North American Free Trade Agreement) or by joining groups of countries like the EU that have free trade within the group.
AOF Business in a Global EconomyLesson 4 Political and Economic Systems
Globalization has brought ethical issues into focus, such as fair trade. Fair trade means paying fair prices to producers in developing countries. In free trade, which is the norm, low cost of production is the most important factor so that profits can be as high as possible. This system has created situations where the people who actually make the goods are exploited, especially in poor countries. Child labor, unsafe working conditions, pollution, and wages below the poverty level are among the issues that fair trade is working on abolishing.
In fair trade, prices are negotiated directly between buyers and producers, and there is a minimum floor of cost below which the price can’t fall. Profits are spread more fairly among all of the people involved in the business. So free trade and fair trade are two very different approaches to international business!
As consumers become more aware of the consequences of unregulated free trade, fair trade has grown in acceptance. It is gaining momentum as it proves itself to be a viable business model.
AOF Business in a Global EconomyLesson 4 Political and Economic Systems
When assessing the level of economic development for a particular country, we look at various economic indicators such as GDP (gross domestic product) and HDI (human development index).
GDP measures the value (at market prices) of all the goods and services produced and consumed in a country in a year; it is a measure of economic activity. It can also be used to assess the standard of living, but the GDP measure has shortcomings.
For example, suppose that in Country A the per capita GDP (GDP per person), expressed in US dollars, is half what it is in the United States. Does this mean that Country A has half the standard of living that people have in the United States? Not necessarily. That depends on prices in the two countries, which determine what a certain income will buy. Since the prices are known, though they vary between countries, the per capita GDP can be adjusted to reflect what a country’s income will actually buy. This adjustment is called purchasing power parity, or PPP.
The GDP measure, in both its basic and PPP versions, helps businesses judge the size and growth of a country’s economy and what people there can afford to buy, as part of the process of determining the country’s suitability for entry.
HDI is a relatively recent indicator, created to measure a country’s quality of life. GDP does not capture important aspects of life (health, for example). The HDI does not address intangible factors such as mental well-being but does include other important aspects of the quality of life, such as life expectancy (which in turn reflects factors like nutrition and medical care), access to education, and adult literacy.
AOF Business in a Global EconomyLesson 4 Political and Economic Systems
A risk analysis is a systematic rating of the potential risks and rewards of doing business in a particular market. It should be performed by businesses whenever they are considering any market entry. It is a way of asking “What is the best possible outcome if we do X (e.g., open a branch in another country, partner with a foreign company, purchase a foreign distributor)? What is the worst possible outcome? How probable is each of these outcomes?”
The list of factors to be considered is long. The following should always be included:
• Social factors, including cultural elements like language and customs.
• Technological factors. Requirements concerning infrastructure (electric power, telecommunications, and transportation, for example), and the host country’s ability to meet those requirements, are vitally important.
• Economic factors such as growth, inflation, or unemployment, and the country’s trade policy. The security that the legal system and national policy give to companies is also very important since it could have a big impact on the risk of potential loss of capital or assets by the company.
• Political factors include protectionist measures that many countries take or conflicts within the country or with its neighbors.
Taken together, these factors help to determine the risks as well as the potential benefits and rewards of going global.
AOF Business in a Global EconomyLesson 4 Political and Economic Systems
Student Resource 4.5
Memo: Country Risk AnalysisTo: Global Business Students
From: Shelby Barton, President and CEO of Solar Dog Homes
Re: Risk Analysis
We at Solar Dog Homes are excited to announce that demand for our product has tripled in the past quarter. Our dog homes have proven to meet a need in overcrowded animal shelters all across the country, and veterinarians and dog boarding facilities have been buying them as well. To meet this increased demand, the board of directors has decided to move our manufacturing locations abroad. Specifically, we are looking for the country that will have the most favorable conditions for us to make our one-of-a-kind dog homes. On site, we would like locals to build seven styles of pressure-treated, wood-framed dog homes and to make and install heating and cooling systems for them, including the solar-powered digital temperature gauge, the fan, and the heater.
You and your team are here to help us decide in which country to locate our manufacturing plant. Each team will be conducting a STEP analysis to determine the social, technological, economic, and political risks in each country considered as well as the potential rewards and benefits to Solar Dog Homes from entry into that country. Your group will present your poster and findings at our next meeting. Together, we will choose the best location for our manufacturing facilities. Your teacher will provide you with the names of the countries you will be researching, the specifics about the poster and the presentation, and the date of the meeting. Thank you for your hard work on behalf of Solar Dog Homes!
Directions: This planning guide gives an overview of the steps involved in creating the STEP analysis poster for Solar Dog Homes. Check off the steps as you complete them. You will refer to this guide throughout the project.
Step 1: Write the name of the country your teacher has assigned your group to research and analyze for risk.
Country Name:_________________________________________________
Step 2: Decide which of the four risk categories listed in Student Resource 4.7, Project Activity: STEP Analysis Chart, each group member will be responsible for and record names and topics below.
Name(s)
Topics to research
Step 3: Use these websites for your research. Each member of the group is responsible for finding the information about his or her topic. Share anything helpful you find with your group members. Gather the information you find and record it on Student Resource 4.7, Project Activity: STEP Analysis Chart.
Step 4: Create a poster about the potential rewards, benefits, and risks of locating Solar Dog Homes’ manufacturing plant in the country you analyzed for risk.
Remember to consider the following terms:
reward: something of value given in exchange or recognition for service, help, merit, or hardship
risk: the probability of being exposed to danger, injury, or loss
benefit: an advantage, competitive edge, or monetary gain
Separate the poster into two sections. In one section you will show the four areas of risk analysis separated into quadrants. In the other section you will show instructive graphics and your group’s collective evaluation of the risks and potential rewards and benefits of doing business in the country.
AOF Business in a Global EconomyLesson 4 Political and Economic Systems
Please include the following on your poster: Four quadrants: one for each area of the STEP analysis
The most important factors with details for each of the four quadrants
At least one graphic or image that illustrates something important about the country
An evaluation of the risks, and potential rewards and benefits, of doing business in the country
Step 5: Give your classmates feedback on their posters using Student Resource 4.8, Feedback Form: STEP Analysis Poster. Then make revisions that will improve the quality of your poster based on the feedback you have received from your classmates.
Step 6: Prepare your presentation for Shelby Barton of Solar Dog Homes. Assign each member of the group a responsibility in the presentation and record the details below. Make sure that all four areas of risk analysis on the poster are covered. Before the meeting, practice until you feel comfortable with the information.
Name
Responsibility
Step 7: Submit the notes you gathered and your poster for assessment. Congratulations!
Directions: You and your group members will use the information you find on the websites listed on Student Resource 4.6, Planning Guide: STEP Analysis Poster, to fill out the chart for your assigned country. Each group member will complete the column for the topic he or she is responsible for.
Directions: Circulate around the room and look at each group’s STEP analysis poster. Fill out one feedback form for each poster and return it to your teacher. When you and your group receive your feedback forms, use them to improve your posters before the meeting with Shelby Barton, the CEO of Solar Dog Homes.
Country analyzed:
What comments do you have about the poster’s organization?
List two things the poster explains or illustrates well.
List one thing the poster could explain or illustrate better and explain why you think so.
What could make the benefits, risks, and/or rewards clearer?
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