U. Washington, Geog. 349: Political and Economic Environments of I.B.

University of Washington
Geography 349, Geography of International Business
Professor Harrington
Political and Economic Environments of International Business

The government of a sovereign state sets the rules under which businesses operate with and within the state -- from the import and export of goods and services to the structure of markets, the conduct of business arrangements, and the legal rights and recourse offered to companies.

Contents:

A matrix of political and economic characteristics

Problematizing the nation state

Measuring national economies

Privatization?

MATRIX OF POLITICAL AND ECONOMIC CHARACTERISTICS

POLITICAL SYSTEM . . ECONOMIC CONTROL (how are economic allocation decisions made?) . . . .

(how are decisions reached on behalf of the sovereign government?) . . . ECONOMIC OWNERSHIP (who owns title to and gains returns from non-labor resources?) . . .

. . Market-Clearing . Mixed . . Command .

. Private Mixed Public Private Mixed Public Private Mixed Public

Direct Democracy . . . . . . . . .

Representative Democracy (parliamentary, presidential, or both) . . . . . . . . .

One-Party Democracy . . . . . . . . .

One Party, Limited Membership . . . . . . . . .

Dictatorship (military, civilian, or clerical) . . . . . . . . .

In addition to noting the situation of a potential national market, source, or production location within this matrix, a company needs to assess the likely stability of the situation, and the direction in which political and economic contexts are changing. For this, make use of recent history, changes in nearby and similar countries, popular political climate, and stability of the national political leadership.

International business operations can adjust to particular political and economic contexts, but the uncertainty of imminent change substantially reduces the attractiveness of a particular country for direct investment. In such contexts, investment needs to be limited, joint, and with probability of substantial payoff in a short time frame.

THE NATION-STATE
We generally assume that sovereign governments (the state) control territories that coincide with the territory dominated by a particular culture, or nation.

But we can think of many examples of multiple nations coexisting under one territorial state: throughout most of sub-Saharan Africa, within Spain, in Canada.
The text provides an example of one state operating two political and economic systems: China's "one country, two systems" with respect to Hong Kong.
In federal systems, sub-national units of government may have laws and regulations that affect business operations within them.

MEASURING NATIONAL ECONOMIES

The total size of an economy is measured by GNP or (on a more territorial basis) GDP (see the distinction, pages 147-8 of the D&R text).

The average economic standard of living is measured by GNP or GDP per capita. Of course, local currencies vary in their purchasing power in domestic markets, so international comparisons can be difficult even when translated into a common currency using prevailing exchange rates.

Relevant for marketing decisions is the distribution of wealth and of income among the population: compare the proportion of countries' wealth (a stock figure) or income (a flow figure) held by the top fifth of the households in each countries. Concentrated wealth leads to a different set of purchasing patterns for the country as a whole than more dispersed wealth and a large middle-income class.

The rate of growth of GDP and GDP per capita are important indicators for international marketing and production decisions.

Relative rates of inflation have tremendous impact on pricing and production decisions in international settings.

Link to a brief article in the Seattle Post-Intelligencer about Starbucks's operations in different Asian markets; note how country location affects product placement, though in this case, the product remains standardized.

THE MOVE TOWARD MARKET ALLOCATION

Privatization: "the movement of ownership from the public to the private sector" [D&R: 166]

Who purchases formerly state-owned assets and operations? Under what circumstances is this a good investment?

condition of tangible assets (physical plant, inventory)
value of intangible assets (goodwill, trade names, technology, employees)
market structure (natural monopoly? traditional monopoly? government contract?)
liquidity of the assets (Is there a stock exchange for selling shares? Is there a market for unwanted components of the physical plant?)

Economies in transition
Note the text's comparison of the experiences of centrally-planned economies in transition: what do Daniels and Radebaugh hold to be "keys to a successful transition to market" structures?

POLITICAL SYSTEM	.	.	ECONOMIC	CONTROL	(how are economic allocation decisions made?)	.	.	.	.
(how are decisions reached on behalf of the sovereign government?)	.	.	.	ECONOMIC	OWNERSHIP	(who owns title to and gains returns from non-labor resources?)	.	.	.
.	.	Market-Clearing	.		Mixed	.	.	Command	.
.	Private	Mixed	Public	Private	Mixed	Public	Private	Mixed	Public
Direct Democracy	.	.	.	.	.	.	.	.	.
Representative Democracy (parliamentary, presidential, or both)	.	.	.	.	.	.	.	.	.
One-Party Democracy	.	.	.	.	.	.	.	.	.
One Party, Limited Membership	.	.	.	.	.	.	.	.	.
Dictatorship (military, civilian, or clerical)	.	.	.	.	.	.	.	.	.