GE Elec 101 - The Entrepreneurial Mind | Module 4

Lesson 1 | Political and Legal Systems in National Environments

Lesson 2 | Government Intervention and Regional Economic Integration

Page | 1

KAPALONG COLLEGE OF AGRICULTURE, SCIENCES AND TECHNOLOGY

Bachelor of Secondary Education

GE Elec 101 - THE ENTREPRENEURIAL MIND

MODULE 4

Name: _________________________________________
Section:________________________
Date Submitted: ________________

Disclaimer
This material is exclusively own by KCAST. Any part thereof may not be copied,
reproduced, distributed, downloaded, transferred, sold, or used in any form
without KCAST’s prior written consent.
GE Elec 101 - The Entrepreneurial Mind | Module 4
Lesson 1 | Political and Legal Systems in National Environments
Lesson 2 | Government Intervention and Regional Economic Integration

Movie Critiquing and Discussion Page | 2

Watch the movie entitled:

No Escape (2015)
Directed by: John Erick Dowdle
Instructions:
1. Briefly discuss your learning out from the watched movie.
2. Discussion/synthesis must be of at least 75 words and at most 150 words.
3. Submit your output before the start of Chapter 6 session.
Note: Late submission of output will not be accepted.

Discussion:
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________

LESSON 1: POLITICAL AND LEGAL SYSTEMS IN NATIONAL ENVIRONMENTS

Country risk is defined as exposure to potential loss or adverse effects on company operations
and profitability caused by developments in a country’s political and/or legal environments sometimes
termed political risk. Government intervention, protectionism, and barriers to trade and investment are
particularly notable in international business. Mismanagement or failure of the national economy can
lead to financial crises, recessions, market downturns, currency crises, and inflation. Such events
usually arise from business cycles, poor monetary or fiscal policies, a defective regulatory
environment, or imbalances in the underlying economic fundamentals of the host country.

How Prevalent Is Country Risk?

Venezuela is dominated by an unpredictable, dictatorial government. Zimbabwe remains under
the dictatorial rule of President Robert Mugabe. Afghanistan is risky in the wake of war and political
instability. Such countries suffer from unstable governments, underdeveloped legal systems, or biased
law enforcement. Conversely, countries such as Canada, Japan, and Singapore are characterized by
stable, transparent, and well-founded political and legal systems. Many of the riskiest states are poor
countries that would benefit enormously from direct investment and integration into the world economy.

Political and Legal Environments in International Business

A political system is a set of formal institutions that constitute a government. It includes legislative
bodies, political parties, lobbying groups, and trade [Link] principal functions of a political system
are to:
1. provide protection from external threats;
2. ensure stability based on laws;
3. govern the allocation of valued resources among the members of a society; and,
4. define how a society’s members interact with each other.
A legal system is a system for interpreting and enforcing laws. Laws, regulations, and rules
establish norms for conduct. A legal system includes institutions and procedures that:
1. ensure order;
2. resolve disputes in civil and commercial activities;
3. tax economic output; and,
4. provide protections for private property, including intellectual property and other company
assets.
Political and legal systems are dynamic and constantly changing. The two systems are
interdependent, changes in one affect the other. Adverse developments in political and legal systems
give rise to country risk. They can result from installation of a new government, shifting values or
priorities in political parties, initiatives special interest groups develop, and the creation of new laws or
GE Elec 101 - The Entrepreneurial Mind | Module 4
Lesson 1 | Political and Legal Systems in National Environments
Lesson 2 | Government Intervention and Regional Economic Integration

regulations. Gradual change is easier for the firm to accommodate; sudden change is harder to deal Page | 3

with and poses greater risk to the firm.

Country risk is always present, but its nature and intensity vary over time and from country to
country. In China, for example, the government is currently overhauling the national legal system,
making it more harmonious with Western systems. Some new regulations have been poorly
formulated or are confusing or contradictory. For example, at one point, the Beijing government
announced that foreign investments in China’s Internet industry were illegal.

Political Systems
The world is characterized by three major types of political systems: totalitarianism, socialism,
and democracy. These categories are not mutually exclusive.

Totalitarianism
Well-known totalitarian states from the past include Nazi Germany (1933–1945), Spain (1939–
1975), China (1949–1980s), and the Soviet Union (1918–1991). Under totalitarianism, the state
attempts to regulate most aspects of public and private behavior. A totalitarian government seeks to
control not only all economic and political matters but also the attitudes, values, and beliefs of the
citizenry. Totalitarian states are generally either theocratic (religion-based) or secular (non religion-
based). Usually there is a state party led by a dictator, such as Kim Jong-un in North Korea. Party
membership is mandatory for those seeking to advance within the social and economic hierarchy.
Power is maintained by means of secret police, propaganda disseminated through state-
controlled mass media, regulation of free discussion and criticism, and the use of terror tactics.
Today, numerous states exhibit elements of totalitarianism, particularly in Africa, Asia, and the
Middle East. Several countries are controlled by heads of state with substantial dictatorial powers,
such as Omar al-Bashir in Sudan, Emomali Rahmon in Tajikistan, and Nicolas Maduro in Venezuela.

Socialism
Socialism’s fundamental principle is that capital and wealth should be vested in the state and
used primarily as a means of production rather than for profit. Socialism is based on a collectivist
ideology. Collective welfare of people is seen to outweigh the welfare of the individual. Socialists
argue that capitalists receive a disproportionate amount of society’s wealth relative to workers. They
believe that in a capitalist society, the pay of workers does not represent the full value of their labor.
They argue government should control the basic means of production, distribution, and commercial
activity.
Socialism has manifested itself in much of the world as social democracy and has been most
successful in Western Europe. It has also played a major role in the political systems of large
countries such as Brazil and India. It remains a viable system in much of the world. Social democratic
governments frequently intervene in the private sector and in business activities, as in Italy and
Norway.

Democracy
Democracy is characterized by two major features:
1. Private Property Rights. Individuals can own property and assets and increase one’s asset
base by accumulating private wealth. Property includes tangibles, such as land and buildings, as well
as intangibles, such as stocks, contracts, patent rights, and intellectual assets. Democratic
governments devise laws that protect property rights. People and firms can acquire property, use it,
buy or sell it, and bequeath it to whomever they want. These rights are important because they
encourage individual initiative, ambition, and innovation as well as thrift and the desire to accumulate
wealth. People are less likely to have these qualities if there is uncertainty about whether they can
control their property or profit from it.
2. Limited Government. The government performs essential functions that serve all citizens.
These include national defense; maintenance of law and order and diplomatic relations; and
constructing and maintaining infrastructure such as roads, schools, and public works. State control and
intervention in the economic activities of private individuals or firms is minimal. By allowing market
forces to determine economic activity, the government ensures that resources are allocated with
maximal efficiency.6
Under democracy, the individual pursuits of people and firms are sometimes at odds with equality
and justice. Because people have differing levels of personal and financial resources, each performs
GE Elec 101 - The Entrepreneurial Mind | Module 4
Lesson 1 | Political and Legal Systems in National Environments
Lesson 2 | Government Intervention and Regional Economic Integration

with varying degrees of success, leading to inequalities. Critics of pure democracy argue that when Page | 4

these inequalities become excessive, government should step in to correct them. Each society
balances individual freedom with broader social goals. In democracies such as Japan and Sweden,
the democracy’s rights and freedoms are construed in larger societal terms rather than on behalf of
individuals.
Virtually all democracies include elements of socialism, such as government intervention in the
affairs of individuals and firms. Socialism emerges because of abuses or negative externalities that
occur in purely democratic or capitalistic systems.
Many countries, including Australia, Canada, the United States, and those in Europe, are best
described as having a mixed political system—characterized by a strong private sector and a strong
public sector, with considerable government regulation and control.

Democracy’s Link to Economic Freedom and Transparency

Economic freedom flourishes when governments support the institutions necessary for that
freedom, such as freely operating markets and the rule of law. As countries develop economic ties
with foreign trading partners and integrate themselves with the global economy, they tend to liberalize
their markets and reduce restrictions on foreign business.
By contrast, countries with the lowest living standards for example, Libya, North Korea, Pakistan
tend to score lowest on political and economic freedoms.
Political freedom is characterized by:
1. free and fair elections;
2. the right to form political parties;
3. fair electoral laws;
4. existence of a parliament or other legislative body;
5. freedom from domination by the military, foreign powers, or religious hierarchies; and,
6. Self-determination for cultural, ethnic, and religious minorities.

The Relationship Between Political Systems and Economic Systems

Each political system tends to be associated with a particular type of economic system. Generally
speaking, totalitarianism is associated with command economies, democracy with market economies,
and socialism with mixed economies.
Command Economy also known as a centrally planned economy, a command economy makes
the state a dominant force in the production and distribution of goods and services. Central planners
make resource allocation decisions, and the state owns major sectors of the economy. In command
economies, sizable bureaucracy thrives, and central planning tends to be less efficient than market
forces in synchronizing supply and demand. For example, goods shortages were so common in the
Soviet Union that people often waited in lines for hours to buy basic necessities such as sugar and
bread. Today, countries such as China and Russia still exhibit some characteristics of command
economies.
Market Economy forces the interaction of supply and demand, and prices. Government
intervention in the marketplace is limited, and economic decisions are left to individuals and firms.
Market economies are closely associated with capitalism, in which the means of production are
privately owned and operated. Participants typically exhibit a market-oriented mentality and
entrepreneurial spirit. The task of the state is to establish a legal system that protects private property
and contractual agreements. However, the government may also intervene to address the inequalities
that market economies sometimes produce.
Mixed Economy exhibits the features of both a market economy and a command economy. It
combines state intervention and market mechanisms for organizing production and distribution. Most
industries are under private ownership, and entrepreneurs freely establish, own, and operate
corporations. But the government also controls certain functions, such as pension programs, labor
regulation, minimum wage levels, and environmental regulation. State-owned enterprises operate in
key sectors such as transportation, telecommunications, and energy. In France, for example, the
government partly owns dozens of companies, mainly in the transportation, communication, and
energy industries. Peugeot and Renault are partially state owned. In Germany, Japan, Norway,
Singapore, and Sweden, the government often works closely with business and labor groups to
determine industrial policy, regulate wage rates, and/or provide subsidies to support specific
industries.10
GE Elec 101 - The Entrepreneurial Mind | Module 4
Lesson 1 | Political and Legal Systems in National Environments
Lesson 2 | Government Intervention and Regional Economic Integration

Legal Systems Page | 5

Legal systems provide a framework of rules and norms of conduct that mandate, limit, or permit
specified relationships among people and organizations and provide punishments for those who
violate these rules and norms. Laws require or limit specific actions while empowering citizens to
engage in others, such as entering into contracts and seeking remedies for contract violations. Legal
systems are dynamic, they evolve over time to represent each nation’s changing social values and the
evolution of their social, political, economic, and technological environments.
In countries with well-developed legal systems, such as Australia, Canada, Japan, the United
States, and most European countries, laws are widely known and understood. In such countries, laws
are effective and legitimate because they are:
1. applied to all citizens equally;
2. issued through formal procedures by recognized government authorities; and,
3. enforced systematically and fairly by police forces and formally organized judicial bodies.
In these countries, a tradition of law exists in which citizens consistently respect and follow the
rule of law. Rule of law refers to a legal system in which rules are clear, publicly disclosed, fairly
enforced, and widely respected by individuals, organizations, and the government. International
business flourishes in societies where the rule of law prevails. In the United States, for example, the
Securities and Exchange Act encourages confidence in business transactions by requiring public
companies to disclose their financial indicators to investors frequently. In the absence of the rule of
law, firms must contend with great uncertainty, and economic activity can be impeded.
Common Law also known as case law, common law is a legal system that originated in England
and spread to Australia, Canada, the United States, and former members of the British
Commonwealth. The basis of common law is tradition, previous cases, and legal precedents set by
the nation’s courts through interpretation of statutes, legislation, and past rulings. The national
legislature in common-law countries (such as Parliament in Britain and Congress in the United States)
holds ultimate power to pass or amend laws. In the United States, because the constitution is difficult
to amend, the Supreme Court and even lower courts have much flexibility to interpret the law.
Common law is more flexible than other legal systems because it is more open to interpretation by
courts. Judges in a common-law system have substantial power to interpret laws based on the unique
circumstances of individual cases.
Civil Law also known as code law, civil law is found in France, Germany, Italy, Japan, Turkey, and
Latin America. Its origins go back to Roman law and the Napoleonic Code. Civil law is based on an all
-inclusive system of laws that have been codified; the laws are clearly written and accessible. It is
divided into three codes: commercial, civil, and criminal. Civil law is considered complete as a result
of catchall provisions found within the law. Rules and principles form the starting point for legal
reasoning and administering justice. The codified rules emerge as specific laws and codes of conduct
produced by a legislative body or some other supreme authority.
A key difference between the two systems is that common law is primarily judicial in origin and
based on court decisions, whereas civil law is primarily legislative in origin and based on laws passed
by national and local legislatures. In reality, common law systems generally contain elements of civil
law and vice versa. The two systems complement each other, and countries that employ one also
tend to employ some elements of the other.
Religious Law is a legal system which strongly influenced by religious beliefs, ethical codes, and
moral values viewed as mandated by a supreme being. The most important religious legal systems
are based on Hindu, Jewish, and Islamic law. Among these, the most widespread is Islamic law, found
mainly in the Middle East and North Africa. In addition to these areas, other countries with substantial
populations of Muslims (followers of Islam) include India (about 175 million Muslims), Indonesia (205
million), Nigeria (75 million), and Pakistan (180 million).
Islamic Law also known as the shariah, is based on the Qur’an, the holy book of Muslims, and
the teachings of the Prophet Mohammed. Adherents generally do not differentiate between religious
and secular life. Islamic law governs relationships among people, between people and the state, and
between people and a supreme being. It spells out norms of behavior regarding politics, economics,
banking, contracts, marriage, and many other social issues. Thus, Islamic law might be said to
encompass all possible human relationships. Because it is seen as divinely ordained, it is relatively
static and absolute. Unlike other legal systems, it evolves very little over time.
Most Muslim countries currently maintain a dual system, in which both religious and secular
courts coexist. Other countries with large Muslim populations, such as Indonesia, Bangladesh, and
Pakistan, have secular constitutions and laws. Turkey, another country with a majority Muslim
GE Elec 101 - The Entrepreneurial Mind | Module 4
Lesson 1 | Political and Legal Systems in National Environments
Lesson 2 | Government Intervention and Regional Economic Integration

population, has a strongly secular constitution. Saudi Arabia and Iran are unusual in that religious Page | 6

courts have authority over all aspects of jurisprudence.

Many Western banks for example, JP Morgan and Deutsche Bank have subsidiaries in Islamic
countries that comply with shariah laws. Instead of requiring interest payments, they charge
administrative fees or take equity positions in the projects they finance. Many issue sukuks, Islamic-
compliant bonds that offer revenue from an asset, such as a rental property, rather than interest. The
global market for shariah-compliant financial instruments now exceeds one trillion U.S. dollars.
Mixed Systems consist of two or more legal systems operating together. In most countries, legal
systems evolve over time, adopting elements of one system or another that reflect their unique needs.
The contrast between civil law and common law has become blurred as many countries combine
them. For example, legal systems in South Africa and the Philippines mix elements of civil law and
common law. Legal systems in Indonesia and most Middle Eastern countries share elements of civil
law and Islamic law.

Types of Country Risk Produced by Political Systems

Specific risks produced by political systems.
Government seizure takes on various forms:
1. Confiscation is the seizure of corporate assets without compensation. Beginning in the 1980s,
for example, Zimbabwe’s dictator Robert Mugabe systematically seized more than 5,000 farms that
farmers of mostly European descent owned, and redistributed the land to native Zimbabweans.
Recently, Mugabe announced plans to confiscate mines that foreign mining companies owned.
2. Expropriation is seizure with compensation. In Venezuela, ExxonMobil and ConocoPhillips
were forced to abandon multibillion-dollar investments in the local oil industry. Recently, Bolivia’s
President Evo Morales ordered his government to seize Sabsa, a Spanish airline operating in his
country.
3. Nationalization describes government seizure of an entire industry, with or without
compensation. For example, the government of Bolivia nationalized much of the oil and gas industry
in that country. Nationalization occurs in advanced economies as well. Following the global financial
crisis, the federal government of Iceland nationalized most of the country’s banking industry.

Sources: Economist, “Your Mine is Mine,” September 3, 2011, [Link]; Sergio Manaut,
“The Pain in Spain,” Latin Trade, May/June, 2013, pp. 30–31; Robert Wade and Silla Sigurgeirsdottir,
“Iceland’s Rise, Fall, Stabilisation and Beyond,” Cambridge Journal of Economics 36, No. 1 (2012),
pp. 127–144.

Embargoes and Sanctions

Most countries are signatories to international treaties and agreements that specify rules,
principles, and standards of behavior in international business. Nevertheless, governments may
unilaterally resort to sanctions and embargoes to respond to offensive activities of foreign countries. A
sanction is a type of trade penalty imposed on one or more countries by one or more other countries.
Sanctions typically take the form of tariffs, trade barriers, import duties, and import or export quotas.
They generally arise in the context of an unresolved trade or policy dispute, such as a disagreement
about the fairness of some international trade practice. There is much evidence suggesting that
sanctions often do not achieve desired outcomes. For example, the United States has imposed trade
sanctions on Iran and Syria. However, goods continue to flow in and out of both countries from China,
Germany, Japan, and numerous other trading partners.
An embargo is an official ban on exports to or imports from a particular country to isolate it and
punish its government. It is generally more serious than a sanction and is used as a political
punishment for some disapproved policies or acts. For example, the United States has enforced
embargoes against Iran and North Korea, at times labeled as state sponsors of terrorism. The
European Union has enacted embargoes against Belarus, Sudan, and China in certain areas, such as
foreign travel, to protest human rights and weapon-trading violations.

Boycotts Against Firms or Nations

Consumers and special interest groups occasionally target particular firms perceived to have
harmed local interests. Consumers may refuse to patronize firms that behave inappropriately. A
boycott is a voluntary refusal to engage in commercial dealings with a nation or a company. Boycotts
and public protests result in lost sales and increased costs (for public relations activities needed to
restore the firm’s image). Disneyland Paris and McDonald’s have been the targets of boycotts by
GE Elec 101 - The Entrepreneurial Mind | Module 4
Lesson 1 | Political and Legal Systems in National Environments
Lesson 2 | Government Intervention and Regional Economic Integration

French farmers, who believe these firms represent U.S. agricultural policies and globalization, which Page | 7

many French citizens despise.

Terrorism
Terrorism is the threat or actual use of force or violence to attain a political goal through fear,
coercion, or intimidation. It is sometimes sponsored by national governments. Terrorism has escalated
in much of the world, as exemplified by attacks in France, India, the Philippines, Spain, the United
Kingdom, and the United States, as well as various countries in the Middle East. In addition to causing
loss of life, terrorism can severely damage commercial infrastructure and disrupt business activities. It
induces fear in consumers, who reduce their purchasing, potentially leading to economic recession.
The transportation and retailing industries are particularly affected.

War, Insurrection, and Violence

War, insurrection, and other forms of violence pose significant problems for business op- erations.
Although such events usually do not affect companies directly, their indirect effects can be disastrous.
Violent conflict among drug cartels and security services along the U.S.–Mexico border has led some
firms and financiers to withdraw investments from Mexico because of perceived heightened risks and
political instability. In India, Tata Motors (www. [Link]) shifted the location of a major new
factory due to violent protests by local farmers who feared the loss of their livelihood.

Managing Country Risk

1. Proactive Environmental Scanning. Anticipating country risk requires advance research.
Scanning allows the firm to improve practices in ways that conform to local laws and political realities
and to create a positive environment for business success. One of the best sources of intelligence in the
scanning process is employees working in the host country. They are knowledgeable about evolving
events and can evaluate them in the context of local history, culture, and politics.
2. Alliances with Qualified Local Partners. A practical approach to reducing country risk is to enter
target markets in collaboration with a knowledgeable and reliable local partner. Qualified local partners
are better informed about local conditions and better situated to establish stable relations with the local
government. Western firms often enter China and Russia by partnering with local firms that assist in
navigating complex legal and political landscapes.
3. Protection Through Legal Contracts. A legal contract spells out the rights and obligations of each
party. Contract law varies widely from country to country, and firms must adhere to local standards. For
example, a Canadian firm doing business in Belgium generally must comply with the laws of both
Belgium and Canada as well as with the evolving laws of the European Union.

Firms generally employ any of three approaches for resolving international disputes.
1. Conciliation is the least adversarial method. It is a formal process of negotiation with the
objective to resolve differences in a friendly manner. The parties in a dispute employ a conciliator, who
meets separately with each in an attempt to resolve their differences.
2. Arbitration is a process in which a neutral third party hears both sides of a case and decides in
favor of one party or the other, based on an objective assessment of the facts. Compared to litigation,
arbitration saves time and expense while maintaining the confidentiality of proceedings.
3. Litigation is the most adversarial approach and occurs when one party files a lawsuit against
another to achieve desired ends. Litigation is most common in the United States; most other countries
favor arbitration or conciliation.

Source: Authorized adaptation from the United States edition, entitled International Business: The New Realities, Fourth Edition,
ISBN 978-0-13-432483-8 by S. Tamer Cavusgil, Gary Knight and John R. Riesenberger, published by Pearson Education ©
2017.
GE Elec 101 - The Entrepreneurial Mind | Module 4
Lesson 1 | Political and Legal Systems in National Environments
Lesson 2 | Government Intervention and Regional Economic Integration

Sharing of Idea on the Issues: Page | 8

1. Huawei and Google in US

_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________

2. Mighty Tobacco
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________

3. ABS-CBN Franchise
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________

Case Problem 4.1

CASE PROBLEM #1:

A country with a history of corruption and bribery has made great efforts via education and
prosecution to conduct government business in an open and fair way. The country has made
considerable progress. As part of its reform, the country overhauled its visa procedures for foreigners
wanting to live in the country. In the previous corrupt environment, people with money would secretly
pay off a government employee to have their visa application approved quickly, while other visa
applications took much longer. Now the government has made the application procedure transparent
and established a new procedure in law. The new procedure offers two visa tracks, the "Regular
Track", which does not require any payment, and the "Premium Track", which requires a US $10,000
payment. The Regular Track takes just as long to process a visa application as an application without
a bribe took before the reforms. The Premium Track moves along just as quickly as a visa application
with a bribe took before the reforms. Most people wanting to immigrate to the country cannot afford
the Premium Track.
GE Elec 101 - The Entrepreneurial Mind | Module 4
Lesson 1 | Political and Legal Systems in National Environments
Lesson 2 | Government Intervention and Regional Economic Integration

1. What are the issues of integrity, ethics and law posed in the case study? Page | 9

_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________

2. What options does the country have, and what should it do and why?
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________

CASE PROBLEM #2:

An international soft drink company has a signature soft drink that it sells all over the world. In
India, the version of the soft drink complies with Indian food and health regulations, but is less healthy
than the drink sold in the European market where the law is stricter. The soft drink company is
obeying the law in India, but it is selling an inferior, less healthy product in a developing country.
1. What are the issues of integrity, ethics and law posed in the case study?
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________

2. What options does the soft drink company and the government of India have, and what
should they do and why?
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________
Source: [Link]
GE Elec 101 - The Entrepreneurial Mind | Module 4
Lesson 1 | Political and Legal Systems in National Environments
Lesson 2 | Government Intervention and Regional Economic Integration

General Instructions and Reminders: Page | 10

1. Comprehend the case provided herein.

2. Answer the case individually and write it on the provided worksheet.
3. Cite only the salient points, limit your answers at a maximum of 75 words.
4. Someone will be called to share his/her answer during the session.

Group Activity: Word Cloud

1. Create a word cloud out from video being watched:
Source: [Link]
What is Really Means to be 'Made of China’ by CNBC Reports
Created by: CNBC International, Published on: March 24, 2020
2. Put your output in pptx.
3. A member from each group will be called to present/discuss their output to the class.
4. A 2-minute presentation will be allocated for each presenter.
GE Elec 101 - The Entrepreneurial Mind | Module 4
Lesson 1 | Political and Legal Systems in National Environments
Lesson 2 | Government Intervention and Regional Economic Integration

LESSON 2: GOVERNMENT INTERVENTION AND REGIONAL ECONOMIC INTEGRATION Page | 11

Governments intervene in trade and investment to achieve political, social, or economic

objectives. They often create trade barriers that benefit specific interest groups, such as domestic
firms, industries, and labor unions. A key rationale is to create jobs by protecting industries from
foreign competition. Governments also intervene to support homegrown industries or firms.
Government intervention is at odds with free trade, the unrestricted flow of products, services,
and capital across national borders. Market liberalization and free trade are best for supporting
economic growth and national living standards. Take the case of Poland. Over time, Poland lowered
trade barriers and participated more freely in international trade, adopting the principle of comparative
advantage. Poland began to use its resources more efficiently. It generated more overall profits for
firms and workers. It acquired more resources with which to import the goods that Polish consumers
desire. As it gradually embraced free trade, Poland’s average annual income rose from about $1,625
in 1990 to more than $14,000 by 2015. These gains did not occur without some turmoil.
Unemployment in Poland increased in some industries as jobs producing certain goods shifted to
other countries better suited to make those goods. However, free trade’s positive effects substantially
outweighed the negative ones. Free trade provides enormous benefits for economic growth and the
welfare of nations worldwide.
In reality, however, governments intervene in business and the international marketplace in ways
that obstruct the free flow of trade and investment. Intervention alters the competitive position of
companies and industries and the status of citizens.

The Nature of Government Intervention

Protectionism is perhaps the leading manifestation of government intervention in international
business. Protectionism refers to national economic policies designed to restrict free trade and protect
domestic industries from foreign competition. Protectionism typically arises in the form of tariffs,
nontariff barriers such as quotas, and administrative rules designed to discourage imports.
A tariff (also known as a duty) is a tax a government imposes on imported products, effectively
increasing the cost of acquisition for the customer. A nontariff trade barrier is a government policy,
regulation, or procedure that impedes trade through means other than explicit tariffs. Trade barriers
are enforced as products pass through customs, the checkpoints at the ports of entry in each country
where government officials inspect imported products and levy tariffs. An often-used form of nontariff
trade barrier is a quota, a quantitative restriction placed on imports of a specific product over a
specified period. Government intervention may also target foreign direct investment (FDI) flows via
investment barriers that restrict the operations of foreign firms.
Government intervention affects economic activity in a nation by hindering or helping the ability of
its homegrown firms to compete internationally. Often companies, labor unions, and other special
interest groups convince governments to adopt policies that benefit them. For example, in the 2000s,
the Bush administration imposed tariffs on the import of foreign steel into the United States. The
rationale was to give the U.S. steel industry time to restructure and revive itself following years of
decline due to tough competition from foreign steel producers. Although the action probably saved
hundreds of U.S. jobs, the tariffs increased production costs for firms that use steel, such as Ford and
Whirlpool. Higher material costs made them less competitive and reduced prospects for selling their
products in world markets. Eventually the steel tariffs were removed but only after causing significant
harm.
Another example of intervention was U.S. government imposed voluntary export restraints on
Japanese vehicles imported into the United States in the 1980s. This move helped insulate the U.S.
auto industry from foreign competition. In a protected environment, however, Detroit automakers had
less incentive to improve quality and design. In this way, protectionism contributed to weakening
Detroit’s ability to compete in the global auto industry. Protectionist policies may also lead to price
inflation because tariffs can restrict the supply of a particular product. Tariffs may also reduce the
choices available to buyers by restricting the variety of products available for sale.
Trade and investment barriers can be considered either defensive or offensive. Governments
impose defensive barriers to safeguard industries, workers, and special interest groups and to
promote national security. Governments impose offensive barriers to pursue strategic or public policy
objectives such as increasing employment or generating tax revenues.

Defensive Rationale
Protection of the National Economy. Proponents argue that firms in advanced economies cannot
compete with those in developing countries that employ low-cost labor. Protectionists demand trade
GE Elec 101 - The Entrepreneurial Mind | Module 4
Lesson 1 | Political and Legal Systems in National Environments
Lesson 2 | Government Intervention and Regional Economic Integration

barriers to curtail the import of low-priced products. The action is intended to protect jobs and ensure Page | 12

higher wages for workers in advanced economies. However, protectionism defies the principle of
comparative advantage, which implies that nations should engage in more international trade, not less.
Trade barriers interfere with country-specific specialization of labor. When countries specialize in the
products they can produce best and then trade for the rest, they perform better. They deliver superior
living standards to their citizens. Blocking imports can reduce the availability and increase the cost of
products sold in the home market. Protectionism can trigger retaliation. This results in foreign
governments imposing their own trade barriers, which reduces sales prospects for exporters.
Protection of an Infant Industry. In an emerging industry, companies are often inexperienced and
lack the latest technologies and know-how. They also may lack the large size typical of competitors in
established industries abroad. A very young industry may need temporary protection from foreign
competitors. A government may impose temporary trade barriers on foreign imports to ensure that
young firms gain a large share of the domestic market. Protecting infant industries has allowed some
countries to develop a modern industrial sector. For example, government intervention allowed Japan
and South Korea to become dominant players in the global automobile and consumer electronics
industries. The U.S. government imposed tariffs on the import of inexpensive Chinese-made solar
cells to protect the emerging U.S. solar power industry. Once in place, however, such protection may
be hard to remove. Industry owners and workers tend to lobby to preserve government protection.
Infant industries in many countries (especially in Latin America, South Asia, and Eastern Europe)
have shown a tendency to remain dependent on government protection for many years. Protected
companies are often less efficient than unprotected firms that compete in free markets. Faced with
few or no competitors, protected companies may produce lower quality products or charge higher
prices for them, which can harm domestic consumers.
National Security. Countries impose trade restrictions on products viewed as critical to national
defense and security. These include military technology and computers that help maintain domestic
production in security-related products. For example, Russia blocked a bid by German engineering
giant Siemens to purchase the Russian turbine manufacturer OAO Power Machines, on grounds of
national security. The Russian government has strict legislation that limits foreign investment in
sectors considered vital to Russia’s national interests. Countries may also impose export controls,
government measures intended to manage or prevent the export of certain products or trade with
certain countries. For example, many countries prohibit exports of plutonium to North Korea because
it can be used to make nuclear weapons. The United States generally blocks exports of nuclear and
military technology to countries it deems state sponsors of terrorism, such as Iran and Syria.
National Culture and Identity. Should foreign entities, say the Japanese or the Saudis, be allowed
to purchase national landmarks such as the Eiffel Tower or Rockefeller Center? In most countries,
certain occupations, industries, and public assets are seen as central to national culture and identity.
Governments may impose trade barriers to restrict imports of products or services seen to threaten
such national assets. In the United States, authorities opposed Japanese investors’ purchase of the
Seattle Mariners baseball team because it is viewed as part of the national heritage. France does not
allow significant foreign ownership of its TV stations because of concerns about foreign influence on
French culture.

Offensive Rationale
National Strategic Priorities. Government intervention sometimes aims to encourage the
development of industries that bolster the nation’s economy. It is a proactive variation of the infant
industry rationale and related to national industrial policy. Countries with many high-tech or high value
-adding industries, such as information technology, pharmaceuticals, car manufacturing, or financial
services, create better jobs and higher tax revenue. Countries with low-tech or low value-adding
industries, such as agriculture, textile manufacturing, or discount retailing create lower value jobs and
less tax revenue. Governments in Germany, South Korea, and numerous other countries have
devised policies that promote the development of relatively desirable industries. Such governments
may provide financing for investment in high-tech or high value–adding industries. They may
encourage citizens to save money to en- sure a steady supply of loanable funds for industrial
investment. These loans enable funding for public education to provide citizens the skills and flexibility
they need to perform in key industries.
Increasing Employment. Governments often impose import barriers to protect employment in
designated industries. Insulating domestic firms from foreign competition stimulates national output,
leading to more jobs in the protected industries. The effect is usually strongest in import-intensive
industries that employ much labor. For example, the Chinese government has traditionally required
GE Elec 101 - The Entrepreneurial Mind | Module 4
Lesson 1 | Political and Legal Systems in National Environments
Lesson 2 | Government Intervention and Regional Economic Integration

foreign companies to enter its huge markets through joint ventures with local Chinese firms. This Page | 13

policy creates jobs for Chinese workers. A joint venture between Shanghai Automotive Industry
Corporation (SAIC) and Volkswagen created jobs in China.

Regional Integration and Economic Blocs

Related to government intervention is the worldwide trend toward regional economic integration.
Also known as regional integration, regional economic integration refers to the growing economic
interdependence that results when two or more countries within a geographic region form an alliance
aimed at reducing barriers to trade and investment. As happened following formation of the European
Union (EU), regional integration increases economic activity and makes doing business easier among
nations within the alliance. At a minimum, the countries in an economic bloc become parties to a free
trade agreement, a formal arrangement between two or more countries to reduce or eliminate tariffs,
quotas, and other barriers to trade in products and services. The member nations also undertake
cross-border investments within the bloc.
In the past half-century, most countries have sought to cooperate with others, aiming for some
degree of regional integration. Today, more than 50 percent of world trade occurs as part of a
preferential trade agreement signed by groups of countries. The trend is based on the premise that,
by cooperating, nations within a common geographic region connected by historical, cultural, linguistic,
economic, or political factors can gain mutual advantages.
Regional integration results from the formation of a regional economic integration bloc or, simply,
an economic bloc. This refers to a geographic area that consists of two or more countries that agree
to pursue economic integration by reducing tariffs and other restrictions to the cross-border flow of
products, services, capital, and, in more advanced stages, labor. Two of the bestknown examples are
the European Union (EU) and the North American Free Trade Agreement (NAFTA). NAFTA consists
of Canada, Mexico, and the United States.
More advanced economic blocs, such as the EU, permit the free flow of capital, labor, and technology
among their member countries. The EU is also harmonizing monetary policy (to manage the money
supply and currency values) and fiscal policy (to manage government finances, especially tax
revenues) and gradually integrating the economies of its member nations. However, recent crises in
Greece, Italy, Spain, and Portugal, and general discord among EU members, are challenging the
progress of regional integration in Europe.

Levels of Regional Integration

The political union represents the ultimate degree of integration among countries, which no
countries have yet achieved. The free trade area is the simplest and most common arrangement, in
which member countries agree to eliminate formal barriers gradually to trade in products and services
within the bloc. Each member country maintains an independent international trade policy with
countries outside the bloc. NAFTA is an example. The free trade area emphasizes the pursuit of
comparative advantage for a group of countries rather than for individual states.

Instruments of Government Intervention

GE Elec 101 - The Entrepreneurial Mind | Module 4
Lesson 1 | Political and Legal Systems in National Environments
Lesson 2 | Government Intervention and Regional Economic Integration

Page | 14

The second level of regional integration is the customs union. It is similar to a free trade area
except that member states harmonize their external trade policies and adopt common tariff and
nontariff barriers on imports from nonmember countries. MERCOSUR, an economic bloc in Latin
America, is an example of this type of arrangement.
In the third stage of regional integration, member countries establish a common market (also
known as a single market), in which trade barriers are reduced or removed, common external barriers
are established, and products, services, and factors of production such as capital, labor, and
technology are allowed to move freely among the member countries. Like a customs union, a
common market also establishes a common trade policy with nonmember countries. The EU is a
common market. It has gradually reduced or eliminated restrictions on immigration and the cross-
border flow of capital.
An economic union is the fourth stage of regional integration, in which member countries enjoy all
the advantages of early stages but also strive to have common fiscal and monetary policies. At the
extreme, each member country adopts identical tax rates. The bloc aims for standardized monetary
policy, which requires establishing fixed exchange rates and free convertibility of currencies among
the member states, in addition to allowing the free movement of capital. This standardization helps
eliminate discriminatory practices that might favor one member state over another. Through greater
mobility of products, services, and production factors, an economic union enables firms within the bloc
to locate productive activities in member states with the most favorable economic policies.

Source: Authorized adaptation from the United States edition, entitled International Business: The New Realities, Fourth Edition,
ISBN 978-0-13-432483-8 by S. Tamer Cavusgil, Gary Knight and John R. Riesenberger, published by Pearson Education ©
2017.

Case Problem 4.2

CASE PROBLEM #1:

TelComm Corporation is a manufacturer of components for the cell phone industry. TelComm
founder Alex Bell heard that China has the world’s largest number of cell phone users and wants to
begin exporting the firm’s products there, but TelComm has little international experience. Mr. Bell is
unaware of the various types of nontariff trade barriers that TelComm might face in China and other
foreign markets. Please summarize major nontariff trade barriers to Mr. Bell.
1. What types of investment barriers might TelComm face if management decides to establish a
factory in China to manufacture cell phone components?
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________
GE Elec 101 - The Entrepreneurial Mind | Module 4
Lesson 1 | Political and Legal Systems in National Environments
Lesson 2 | Government Intervention and Regional Economic Integration

2. What can TelComm management do to minimize the threat of these non-tariff trade and Page | 15

investment barriers?
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________

Source: Authorized adaptation from the United States edition, entitled International Business: The New Realities, Fourth
Edition, ISBN 978-0-13-432483-8 by S. Tamer Cavusgil, Gary Knight and John R. Riesenberger, published by Pearson
Education © 2017.

CASE PROBLEM #2:

You are Vice President for International Sales at FoodTrade, a large trading company that exports
processed foods to Africa. You are often frustrated that African countries impose high tariffs (typically
75 percent) on processed food imports. These barriers raise FoodTrade’s cost of doing business and
make your prices less competitive in African markets. However, Africa suffers from widespread
poverty, and African governments use tariffs to raise needed revenues and achieve policy objectives.
Analyze the arguments for and against high agricultural tariffs in Africa.
1. How do the tariffs harm or benefit Africa?
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________

2. Do you perceive any ethical concerns in Africa’s use of high tariffs on agricultural goods?
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________
GE Elec 101 - The Entrepreneurial Mind | Module 4
Lesson 1 | Political and Legal Systems in National Environments
Lesson 2 | Government Intervention and Regional Economic Integration

Discussion: Sharing of Ideas and Insights Page | 16

1. If given a chance, which country you prefer working and living? Why?
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________

TIMELINE
Let’s be mindful to your deadline. All activities in this module must be submitted on
October 15 to 16, 2022.