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Lecture 7

AFM 333 Lecture 7: Chapter 7 AFM 333

7 Pages

Accounting & Financial Management
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Chapter 7: Political and Legal Systems in National Environments The Nature of Country Risk: - country risk (aka political risk): exposure to potential loss or adverse effects on company operations and profitability caused by developments in a countrys political and/or legal environment - immediate cause of country risk is a political/legal factor, underlying factors may be economic, social, or technological developments Political and Legal Environments in International Business: - political system: a set of formal institutions that constitute a government - political systems are constantly evolving in response to demands and the evolution of the national and international environment - legal system: a system for interpreting and reinforcing laws - legal system incorporates institutions and procedures for ensuring order and revolving disputes in commercial activities, taxing economic output, and protecting intellectual output and other company assets - adverse developments in political and legal systems give rise to country risk (ex: new government, shifting values/priorities in political parties, creation of new laws/regulations, etc) - country risk is always present, but its nature and intensity vary over time and amongst countries Political Systems: Totalitarianism: - well-known totalitarianism states: Nazi Germany, Spain, China, and the Soviet Union - state attempts to regulate most aspects of public and private behavior - seek to control economic and political matters, as well as the attitudes, values, and beliefs of citizens - over time, many of the worlds totalitarian states have either disappeared or shifted towards democracy and capitalism Socialism: - belief that capital and wealth should be vested in the state and used primarily for production rather than for profit - socialism is based on a collectivist ideology where the collective welfare of people is believed to outweigh the welfare of the individual - government frequently intervenes in the private sector and in business activities Democracy: - has become the prevailing political system in many of the worlds advanced economies - characterized by two key features:1) private property rights: the ability to own property and assets and to accumulate private wealth o important because they encourage individual initiative, ambition, and innovation, as well as the desire to accumulate wealth 2) limited government: government performs only essential functions that serve all citizens o state control and intervention in the economic activities of private individuals or firms is minimal o by allowing market forces to determine economic activity, the government ensures resources are allocated with maximal efficiency Democracys Link to to Economic Freedom and Openness: - compared to totalitarianism and socialism, democracy is associated with greater economic freedom and usually higher living standards - economic freedom flourishes when governments support the institutions necessary for that freedom, such as freely operating markets and rule of law - democracy is closely related with openness (lack of regulation/barriers to
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