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Table of ContentsIntroduction ............................................................................................................................................ 1

Political Systems...................................................................................................................................... 1

Changes in the political situation and implications: Middle East and North Africa ........................... 5

Political policies affecting international trade relationships: China and Southeast Asia ................... 7

Change of World Order- East Vs West ................................................................................................ 8

Economy Systems ................................................................................................................................... 9

Socialism vs. Capitalism .................................................................................................................... 10

Transition Economies ........................................................................................................................ 12

Emerging Economies ......................................................................................................................... 12

Legal Systems ........................................................................................................................................ 12

International trade ............................................................................................................................ 13

International Mergers and Acquisitions ........................................................................................... 16

International Acquisitions: Effects of increase in antitrust laws ...................................................... 16

Trade Alliance: .................................................................................................................................. 17

Conclusion ............................................................................................................................................. 22


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Introduction

The massive surge in world trade, coupled with the phenomenon of globalization, has made it

immensely dispensable for every business to understand the role of political, economic and

legal systems in international trade. More specifically, every business has to identify the

different political, economic and legal systems that exist in the market.

The different systems no matter whether they are economic or legal are not stable. The

changing nature and the continuous evolution of these systems present new challenges for

businesses, especially those operating in foreign countries. Failure to adapt the operations,

objectives and marketing strategies of the business with the political, legal or economic

systems can prove to be fatal for the company and may lead to its permanent exile from the

country.

The chapter on National Differences in Political Economy was very enlightening, mostly

because it allowed us to explore the different types of political, economic and legal systems

present in all parts of the world. However, our study on this topic was not just limited to

textbooks. It was coupled by an equally extensive study of the current events related to this

topic. Throughout the report, we have to tried to explain the theory and its implications with

the help of examples from the current events. We hope that anybody reading the report will

find it as interesting as we found the topic.

Political Systems

Political System is the system of politics and government of a nation. Political system can beassessed according to two dimensions

1. Collectivism against Individualism2. Totalitarianism and democracy

Collectivism: Collectivism is a political structure in which citizens are encouraged to

sacrifice their individual rights for the good of the society and thus property is meant to have

common ownership. The basis of this political theory arises from the assumption that needs

of the society as a whole is considered more important than individual freedom.

Socialism: Socialism was formed on the basis of collectivism political belief system. Karl

Marx argued that capitalists in the society take advantage of workers or employees by not

paying adequate wages and the wages do not truly reflect value input by the workers. So his

proposition was state ownership of basic means of production, distribution and exchange

which would ensure fair wages for the employees, hence it will serve the society rather than

individual capitalists.

In the last century the socialist ideology was divided into two camps. The communists and

social democrats promoted their own form of socialism and the means for achieving them.


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Communism- Socialism through revolution of any kind and totalitarian dictatorship Social democrats: Socialism through democracy

Social democracy had its greatest influence in a number of democratic western nations in the

last century. Britain, Germany, France all had social democratic parties that were elected into

office from time to time. But state owned enterprises performed poorly and citizens ended up

paying even higher prices for goods and high taxes for sustaining these inefficient states

owned companies, hence most of them were voted out of office.

Individualism: Individualism refers to a philosophy that an individual should have freedom

in his or her economic and political pursuits. It is based on two central tenets

Individual freedom and self expression Welfare of society is best served through individuals economic pursuit

Individualism stands in direct conflict with collectivism. This ideological conflict has shaped

much of the recent history of the world. The cold war was essentially a war between

collectivism championed by the Soviet Union and Individualism promoted By United States.

Case study: Communism and Soviet Union

The Soviet Unions collapse into independent nations began early in 1985. After years of

Soviet military buildup at the expense of domestic development, economic growth was at a

standstill. The Soviet economy was backwards - factories and mines were decrepit and out of

date.

Failed attempts at reform and a stagnant economy had plunged productivity level of the

country at a miserable state. As a result many people were much poorer than the poorest

people in the capitalist West

Afghanistan had become "Russia's Vietnam" and this war led to a general feeling of

discontent, especially in the Baltic republics and Eastern Europe. Greater political and social

freedoms, instituted by the last Soviet leader, Mikhail Gorbachev, created an atmosphere of

open criticism of the Moscow regime. Several Soviet Socialist Republics began resisting

central control, and increasing democratization led to a weakening of the central government.The USSRs trade gap progressively emptied the union coffers, leading to eventual

bankruptcy.

The Soviet Union finally collapsed in 1991 when Boris Yeltsin seized power in the aftermath

of a failed coup that had attempted to topple reform-minded Gorbachev. The Soviet Union

did not collapse as the result of a weak military and the threat of military might. A failed

internal economy provided fuel for the Soviet failure. The Soviet Union collapsed despite the

fact it had a strong military, if not at least in part as a result of the unbalanced governmental

attention to military needs.


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As the Soviet Union crumbled at the end of 1991, and Communism fell apart, it was obvious

that there would be plenty of fallout in the coming years. Countries were created almost

overnight and with them a wealth of opportunities. But these new countries were singularly

unprepared for independence. There were few clearly defined national policies, almost no

concept of the challenges that faced them and, as such, they found themselves in majordifficulties when foreign investors came knocking.

Some of these new states coped slightly better than others it has to be said, while some are

still in absolute confusion and uproar. Smaller countries, and some are still coming to terms

with the upheaval of 1991, but it was less true for the Baltic States. Estonia, Latvia and

Lithuania have adapted well to their newly-found independence and have been thriving.

Democracy: Democracy in modern times has taken the form of representative democracy. In

such political structure citizens periodically elect individuals to represent them. A number of

safe guards are typically enshrined in constitutional law to keep check and balance of thecurrent elected representatives.

Totalitarianism: Totalitarianism is the polar opposite of democracy. In such political

structure citizens have none of the constitutional guarantees that are bestowed in a democratic

system. Basic civil liberties, free and fair elections and free media all these constitutional

rights are denied.

Totalitarianism has taken four major forms.

Fig: Four major forms of totalitarianism

Communist

Totalitarianism

China

Vietnam

Laos

Cuba

Theocratic

Totalitarianism

Iran

Saudi Arabia

Tribal

Totalitarianism

Zimbabwe

Uganda

Right wing

totalitarianism

South Korea

Taiwan

Singapore


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Case study: Cuba and Totalitarianism

Cuba is a totalitarian communist state headed by General Raul Castro and a cadre of party

loyalists. Castro replaced his brother Fidel Castro as chief of state, president of Cuba, and

commander-in-chief of the armed forces on February 24, 2008. The first Communist Party

Congress (CPC) since 1997 was held in April 2011, where Raul Castro was officially named

first secretary of the Communist Party. He announced that 80-year-old Jose Ramon Machado

Ventura would remain second-in-charge and Vice President Ramiro Valdes would remain as

number three.

The Cuban Government seeks to control most aspects of Cuban life through the Communist

Party and its affiliated mass organizations, the government bureaucracy, and the state security

apparatus. The Cuban media are tightly controlled by the government and journalists must

operate within the confines of laws. The government maintains complete control over all

forms of mass media, including newspapers, radio and television. The Communist Party,enshrined in the constitution as the superior leading force of society and of the state,

determines content and editorial tone, resulting in almost complete uniformity across all

broadcasts and publications. Independent journalists face censorship as well as detention and

harassment by state security. Similarly, the government limits access to the Internet to a small

number of professionals and party faithful and employs monitoring and blocking

technologies to further restrict freedom.

The State law subordinates freedom of speech, freedom of the press, and freedom of

assembly to the aim of building a socialist society. Anti -government propaganda and

criticism of national leaders carry penalties of up to three years in prison.

Authorities have used surveillance, short-term detentions, and state-organized mobs to

interfere with unauthorized meetings and public demonstrations. Civil society groups have

reported dozens of cases in which state security and police prevented or broke up meetings

using house arrests, short-term detentions, and checkpoints around planned meeting sites. The

government also continues to regularly employ organized mobs to humiliate opponents and

interfere with peaceful assemblies. Although the government characterizes counter-

demonstrations as spontaneous, participants arrive in government buses and openly

coordinate with state security officials.

Systematic suffocation of basic civil rights has constrained economic growth of Cuba.

Unless drastic political and economic reforms are implemented Cuba the future of Cuba

appears extremely bleak.


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Changes in the political situation and implications: Middle East and North

Africa

The prevailing political systems in the various nations of the Middle East and North Africa

have been undergoing significant change. It has been triggered by various political, religious,

social and economic factors.

Change of power and political forces in Middle East and Africa : In the theocracy or

autocracy dominant Middle East and Africa, recently there has been uprising in several

countries such as Tunisia, Egypt, Libya, Syria, Yemen etc. In some cases, the uprising has

even led to change of political regimes. The West has also played a significant role in

removal of the autocratic leaders in some of the countries in the region, for example Iraq and

Libya. But such hostility did not always exist between these two parts of the world. The

interest of west in the region is multilayered. Wests political relationship with some of the

Middle Eastern and North African countries has been rather volatile and various politicalforces have influence the change in political setting in the region as depicted in the case

studies below.

Case Study 1- Iraq:

During the cold war the West, particularly United States (and Soviet Union) actively

encouraged the autocratic regime in the middle-east for various geopolitical reasons. Irans

West-friendly brutal despotic regime governed by Shah was overthrown by a religiously

extreme and anti-US regime and therefore the US supported its neighbor Iraqs Saddam

Hussein and encouraged a brutal, almost decade-long war against Iran. Post 9/11, the USinvaded Iraq during the War on Terror and eventually removed Saddam Hussein from

power.

Case Study 2- Libya:

Since Libyas Muammar Gaddafis rise into power over 40 years ago in a coup, he has been

seen as an international pariah. Yet, until the recent crisis, the West had been opening up to

him and was keen to do (mostly oil and some arms) business with him as they have been

with various others in the region. But recently through military action of NATO, he was

eventually killed.

Now an Islamic, democratic, federal parliamentary republic has been instilled in Iraq, while

much political reformation is also taking place in Libya and Egypt.

The implications of the political changes and resultant turmoil in the Middle East and North

Africa on international business and trade are as given below:

Energy security: The crisis in Middle East and oil exporting countries has already affected

oil price and as a result international trade evidently has been affected. Energy security is

now a major concern and many countries are looking for alternative resources. There arelikely to be natural gas supply disruptions, particularly for companies in energy-dependent


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Southern Europe. Since the beginning of the protests against Gaddafi, the oil price has

increased by around 20%, However, the hike in oil prices is not related directly to the

decrease in Libyan production. There was therefore no shortage of available oil on the

market as Saudi Arabia increased production to fill the oil gap, but fears and speculations

about a spill-over of the unrest into Algeria or Saudi-Arabia drove up prices nonetheless.

Market attractiveness: Although investors were becoming more and more interested in

emerging markets in Asia, the turmoil in Middle East may have contributed to lessening of

market attractiveness of the region. As political risk rises, country risk information is set to

become even more essential to companies dealing with foreign counterparties.

Impact on Businesses: Political instability in the Middle East is likely to affect companies

that have a significant exposure to this area, such as European agri-food and textile

businesses and Asian exporters. Countries which exported manpower to Middle Eastern and

African countries also faced severe difficulty. For example, Bangladesh itself was hit harddue to the Libyan crisis. Thousands of Bangladeshi migrants in Libya were forced to return

due to the turmoil. Moreover, supply chain disruptions and increased payment risks are likely

to impact on companies globally. Lenders and insurers are likely to re-price political risk in

several emerging markets in the long run, thus leading to higher credit and insurance costs for

foreign and local companies.

Selective intervention: The intervention by West resulting in overthrow of the government

in some Middle Eastern countries has raised many questions, particularly because of selective

intervention of US and Western countries in some countries, while avoiding others which

have similar autocratic regime. The official reason for the Iraq War in 2003 was stated asIraqs supposed possession of weapons of mass destruction, which was later refuted. Not only

the country did not pose a threat to the rest of the world, but also no link to Al Qaida the

terrorist group responsible for the 9/11 attack was found. Many attributed the United States

intention to take control of Iraqs vast oil reserve as the real reason of the war. Upon further

analysis several experts opined it was not even or only oil, rather influence of overlapping

neoconservative network of capillary power relations and the Israel lobby that instigated the

war against Iraq. The notions of unipolarism, exceptionalism and the applications of military

power of both the U.S. and Israel had at least as much weight in the decision to invade.

Several analysts have observed that Iraq rather posed a threat to the aspirations of U.S. andIsraeli expansionism in the Middle East. By taking advantage of their privileged positions of

power and influence, these groups played a central role in changing the face of the region

violently in the name of instilling democracy. This may have also later fueled further

interventions in Middle East. The impact of such invasion on the global economy and

business has been quite extensive.

Arms Business:On one hand, United States is one of the leaders in global arms business and

ongoing conflict and intervention in Middle East would actually have a positive effect on the

arms trade.


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Huge military expenses: Such interventions often lead to extensive military expenses for

countries involved. For example, the economy of the United States itself was affected

adversely by the vast expenses of military actions in Iraq.

Oil price hike:On the other hand, due to such instability in Middle East, oil price is often

highly destabilized raising business costs. In Bangladesh, the RMG and several other sector is

directly affected when such spike oil price occurs.

Political policies affecting international trade relationships: China and

Southeast Asia

Chinas political economy with Southeast Asia started to change, beginning in the early

1980s with three key policy initiatives. China actually experienced a confrontational

relationship with Southeast Asia from the 1950s to the 1970s, but because of these three

policies, it has changed its political economy with both individual Southeast Asian countriesand with the region as a whole.

The open-door policy, introduced in 1979, was a comprehensive mechanism that changed

Chinas overall relations with the world, including Southeast Asia. China restored direct trade

with Indonesia and started indirect trade with Brunei. Prior to this policy, Chinas

relationship with Southeast Asian countries was a little hostile, with the exception of Burma

and Cambodia.

The good-neighbor policy of 1990 was directed at Chinas neighbors, Southeast Asia

principal among them. Some of the objectives of China involving the Southeast Asia regionwere- tapping the energy potential in Central Asia and islands in the South China Sea;

seeking access to the Indian Ocean through Myanmar and Pakistan; securing, enlarging, and

integrating markets, and mobilizing capital, technology, and managerial skills from ASEAN

etc.

The go global strategy of 2002 aimed at pushing Chinas investments and enterprises

abroad, in contrast with the open-door policy that brought international capital into the

Chinese market.

Increasing trade:Chinas trade and investment relationship has improved significantly withSoutheast Asia through these policies. Imports and exports between China and Southeast

Asia have noticeably grown. Although Southeast Asia has enjoyed a trade surplus with China

since 1996, these countries have, in the meantime, enlarged their trade dependence on China.

Chinas investment in Southeast Asia is not as significant as its trade, but it has expanded its

investments in Southeast Asia, particularly since the implementation of the go global

policy in 2002.

Tourism to Southeast Asia:Chinas tourism to Southeast Asia is also on the rise. China has

become the fourth-largest source of international arrivals to Southeast Asia since 1999, after

Japan, Singapore, and Malaysia.


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Regional Integration:Chinas accord with Southeast Asia is also reflected in Chinas closer

linkage with ASEAN in recent years. China has not only joined the decision-making process

in economic affairs with Southeast Asia but also has taken part in consultation on political

and security issues through the ARF. In addition to Chinas regular summit with ASEAN

since 1997, China took the initiative to establish a free trade area with Southeast Asiancountries which came into effect in 2010, a development that brings to culmination a series of

bilateral and multilateral agreements and memorandums between China and Southeast Asian

countries.

Although some problems still exist between China and Southeast Asia (e.g., territorial

disputes over the South China Sea and Chinas increasing military strength in the region), the

Asian giant has abandoned its confrontational relationship with Southeast Asia to history, and

a new chapter of agreement and harmony with countries in Southeast Asia is well underway.

Change of World Order- East Vs West

As many countries in the Middle East are currently undergoing political reformation and

turmoil, another occurrence has been observed in Asia, albeit of different nature. Members of

the BRIC, Particularly China and India have become one of the fastest growing and major

economies in the world. Already an invisible shift in world order has been observed, which

signals the emergence of new superpowers which will eventually replace United States as the

leading superpower. This phenomenon has given rise to assumptions that the transition may

give rise to power struggles and change in political systems and may influence political

decisions taken by the major countries. It has been also observed that the Middle East crisis

and The Wests intervention arguably may have been fueled by the changing world order and

reflect the struggle of United States to hold its superior position as a super power. As most of

the western countries are facing difficulty due to the recent financial crisis, the markets in

Asia are quickly emerging and evolving to become the center of international business and

trade. These rising powers in the East are nationalistic and populous. Consumer markets in

these superpowers in the east are on an explosive trajectory and will drive innovation in the

future. It is expected half of the worlds consumer market will be captured by these nations

whereas it was thought before United States consumer market was the last resort of

consumers. But Asia's growing economic power is translating into greater political and

military power; therefore it is also increasing the potential damage of conflicts. The stakes inAsia are huge and will challenge the West's adaptability.


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Economy Systems

Three Types of Economic Systems:

An economic system is the set of structures and processes that guides the allocation of scarce

resources and shapes the conduct of business activities in a nation. There are three types of

economic systems:

Market Economy: A free-market (capitalistic) economy is built upon the privateownership and control of the factors of production

Command Economy: A centrally-planned or command economy is built upongovernment ownership and control of the factors of production

Mixed Economy: An economy in which economic decisions are largely market-driven and ownership is largely private, but significant government intervention is

still evident

In reality, most of the economies are mixed economies. The economic state of a country is a

result of its political system. For instance, countries with communist or social systems usually

have command economies; one such example is Venezuela. On the other hand, countries

practicing capitalism and democracy have market economies. The United States of America

is the closest example of a capitalist nation.

Case: The Economic States in India, China and Japan

At present, the three largest Asian economies namely, India, China and Japanare mixed

economies. Yet there are significant differences between their systems. In India, one can still

find traces of traditional economy (which is neither market nor command economy). In a

traditional economy, economic decisions, especially the division of factors of production, are

based on religious and cultural values. In the case of rural India, the traditional economy

presents itself in the form of allocating human resources in accordance with the caste system.

For instance, people in Shudra castes often termed as the untouchables are placed in

low-skilled, low-paid occupations such as sweepers. Indias transition to a market based

economy clearly illustrates that a traditional economy like this is both unsustainable andunfair.

China is slowly shifting from a command economy to a market economy. The present

Chinese economy is very interesting since it is not clear whether the economy is based on

socialism or capitalism. Over the years, the Chinese government has undertaken a large

number of market reforms, which indicate its shift to a market economy. For instance, the

series of privatizations has attracted a lot of foreign direct investment (FDI) into China.

However, despite that, many private entities, especially the local entrepreneurs, believe that

the Chinese government is intentionally stifling the growth of the private sector. This

dissatisfaction of the local Chinese entrepreneurs is instilled in the popular catch-prase Guo


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Jin, Min Tui which means that even though the Chinese economy and government is

progressing, the private sector and its citizens are lagging behind.

Japan, among these three economies, is the closest to a market economy. And such economic

structure has been one of the factors behind its pool of extremely efficient citizens (who are

motivated by incentives), helping the country emerge as a superpower.

Socialism vs. Capitalism

Under socialism or command economic system, incentives either play a minimal role or are

completely ignored. A command economy without market prices or profits and where

property is owned by the state is a system that lacks an effective incentive mechanism to

direct economic activity. By failing to emphasize incentives, socialism is definitely a theory

that is inconsistent with human nature and is therefore doomed to fail. On the other hand, the

strength of capitalism can be attributed to an incentive structure based upon the three Ps: (1)prices determined by market forces, (2) a profit-and-loss system of accounting and (3) private

property rights. The failure of socialism can be traced to its neglect of these three incentive-

enhancing components.

Case: Venezuela Embracing Socialism & The Exile of Multinational Companies

Despite the fact, a few countries have embraced or held on to socialism and command

economy. One such country is Venezuela, which has undertaken Socialism of the 21st

Century ideology. Under the leadership of President Hugo Chavez, Venezuela has started its

journey towards being a socialist nation. Other Latin American countries, such as Ecuador,have followed suit.

The case of Venezuela clearly illustrates the different implications for international

businesses when the country in which it operates shifts from a market economy (with friendly

environment for private businesses) into a command economy (with a hostile environment for

private businesses). For instance, in Venezuela, several American multinational oil

companies (including big names like ExxonMobil and ConocoPhillips) were forced to

abandon their multi-billion dollar investment in the local industry. The wraths of these

companies have already fallen over the countrys political leaders, especially Hugo Chavez.

However, these multinational companies are not in any position to influence the VenezuelanGovernments decision. Hugo Chavez is still on a nationalization spree, nationalizing

everything from real estate companies to steel companies.

It is not evident whether this renewed interest in socialism is justified or whether command

economic system (created by the socialist system) is sustainable in the long run. In the case of

Venezuela, recent polls have suggested that most of the countrys citizens are unhappy with

the current economic system and would rather prefer having private property rights. Given

such public dissatisfaction with the economic system, the overall condition of the countrys

economy is going to suffer as people lose their motivation to work harder due to the absence

of incentives.


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Criticism of Capitalism

According to many economists, the last global financial crisis is due to the failure of

capitalism. Excessive deregulation has allowed banks to take excessive risks, leading to the

unprecedented growth of subprime and Alt-A mortgages in the United States. Due to

capitalism, financial markets were allowed to "regulate themselves; the misuse of limited

liability by U.S. investment banks created a climate of ever-increasing risk-taking and casino

capitalism. In effect, bankers were funding their lending with as little as 4 percent of their

own capital. Such irresponsible behavior was matched only by that of many U.S households,

which, laboring under the popular misconception that there would be continual increases in

property value, refinanced their mortgages to fund ever-greater consumption.

Another reason that capitalism is unstable is that it is fundamentally based on speculation.

Professional investors and investment funds dominate the financial markets and compete with

each other. They buy and sell based not on their forecasts of long-term demand/supplyconditions but on their observations of each others movements and readings of each others

intentions. When a price is expected to rise or fall, it is not irrational to buy or sell more and

move the price further up or down, leading to speculative bubbles and panics.

The more fundamental reason that capitalism as a whole is speculative and inherently

unstable is that the money on which it is based is itself speculative. Money has made the

economy much more efficient by making it possible to conduct transactions without the

trouble of exchanging on a barter basis. But money has no intrinsic value. People are willing

to hold it only because they expect other people to accept it in exchange for something else,

with the people who accept it expecting that yet other people will accept it in turn. Notsurprisingly, capitalism of the current age has often been referred to as casinoism.

International financial liberalization like other forms of economic liberalization is thought to

have a positive effect on the efficiency of resource allocation and the rate of economic

growth. However, after the last global financial meltdown, The public sector (US

government) therefore, had no choice but to work on a bailout plan of these institutions worth

$700bn, and recaptured state control of these institutions to keep the economy from the blink

of collapse. The nationalization of the financial institutions, according to many observers, is

an indication of the collapse of capitalism and the resurgence of socialism.

Case: Capitalism and its Many Critics

The concept of capitalism has attracted a lot of critics in the past years. And the criticism was

largely initiated by the last global financial meltdown, which led to the collapse of the

worlds largest financial institutions the so-called emblem of modern-day capitalism. Even

last September, capitalism sparked a series of demonstrations called Occupy Wall Street in

the United States. The demonstrators point out the following drawbacks of capitalism:


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(i) Capitalism promotes income inequality: Roughly 1 percent of the citizens of theUS the worlds most capitalist nation hold more than 40 percent of the

countrys wealth.

(ii) Capitalism makes private corporations extremely powerful: Multinationalcorporations, such as Coca Cola, are known for creating undue influence on thegovernmentoften to the disadvantage of the general public

(iii) Capitalism causes competition and unemployment: An incentive-driven culture,promoted by capitalism, causes an immensely competitive environment, where it

is difficult for many to survive and stay employed.

Transition Economies

A transition economy is an economy that is changing from a centrally planned economy to a

free market. One such transition economy is China. Market reform in China began in

agriculture in 1978. The key elements were the leasing of land to individual farmers and theestablishment of a two-track price system (lower prices for government orders and market

prices for the surplus). Responding to the profit motive, individual farmers increased their

productivity and agricultural output soared. In 1980, China created special economic zones

(SEZs) open to foreign investment, private ownership, and international trade. Reforms in

China also included building institutions to facilitate the market system and its

macroeconomic control. China replaced the system of "profit transfers" from state enterprises

to the central government with an enterprise tax system.

Emerging Economies

There are approximate 28 emerging markets in the world; these emerging economies are

undergoing rapid growth and industrialization. Among these economies, the BRIC nations

(consisting of Brazil, Russia, India and China) and their successors, the Next Eleven

economies (consisting of Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan,

Philippines, South Korea, Turkey, and Vietnam), are the most promising. Foreign companies,

which wish to invest in those emerging economies, will certainly benefit from the large

market size and the increasing purchasing power of the market in those economies. However,

despite such attractiveness of these economies, the companies may still come across several

challenges, such as lack of proper infrastructure.

Legal Systems

Legalities and legal issues play a key role in international trade. Trade restrictions can occur

due to legislative actions. On the other hand, trade alliances can be pivotal to the

development of nations who are party to the agreement. Contract enforcement also has

different dimensions and is critical particularly when trade takes place between two or more

nations.


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Differences in the structure of law between countries can have important implications for the

practice of international business. There are three common legal systems: i) Common Law ii)

Civil Law iii) Theocratic Law

The common lawsystem is commonly found in former Great Britains colonies and is based

on countrys legal history, past court rulings on cases and ways in which laws are applied in

specific situations. Countries like United States, Australia, India uses common law systems.

In civil law system, laws are based on detailed set of written rules and codes. Judges have

less flexibility and have power only to apply the law-there is no scope for interpretation.

France, Germany, Russia operate with a civil law system.

Some counties have theocratic legal system, which is based on religious teachings. Countries

like Pakistan, Saudi Arabia, Iran and Middle Eastern nations follow Islamic laws, which are

based on the holy principles of Koran.

Implications of Laws and Regulations in International Business:

Legal mandates affect the practice of international business. The degree to which property

rights are protected can vary dramatically from country to country as can product safety and

product liability legislation and the nature of contract law. The impact of legal system on

three sector- international trade, international accusations and trade alliance has been

discussed below.

International trade

Common Law versus Civil Law: In the field of international business conflict between

common and civil law has to be considered. The divergence has impact on various aspects of

legal issues involving business. For example, breach of contract is subject to many

considerations pertaining to the difference between common and civil law regarding the

matter.

Both the legal systems have different approach towards contract law. A contract law governs

the enforcement of a contract. Under common law the contracts drafted are very detailed with

all specifications pointed out. Such contracts are expensive to draw up and disputes can be

adversarial in common law systems. Civil laws on the other hand tend to be much shorter as

most issues are already covered in a civil code. The two systems have different judgments on

whether to enforce certain contractual fractions or not.

Case example: Treatment of liquidated damages and penalty clauses.

A liquidated damage clause in a contract is intended to estimate damages in the event of non-

performance or breach of contract. A contract clause penalizing one party for non-

performance or breach of contract will be met with a different response in common law

versus civil law jurisdictions. In a common law jurisdiction as in US, Australia, such a clausewill not be enforced if it is not reasonable in proportion to the actual or anticipated damage,


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and if it is designed to penalize the breaching party. In civil law jurisdictions as in China,

France, the assumption is that a penalty clause is enforceable. Civil law allowed for penalties

to encourage performance of contractual obligations. However, the penalties may be reduced

if it reaches a certain level of excessiveness through arbitration. Such differences in

enforcement of contractual terms emphasize the importance of jurisdiction in internationaltrade.

Property rights and corruption: Countries differ in the extent to which their legal systems

define and protect property or resources rights. Trade becomes difficult if foreign countries

face the danger of their property being violated either through private or public actions.

Case example:NIGERIA corruptionpolitical conflict among Nigerias tribes and ethnic sects

has limited political stability leading to civil wars. The legal framework of the country is

weak and its political leaders are constantly plundering national treasury to reward their

allies. This has slowed down infrastructural developments, foreign investments andinternational trade as corrupted legal apparatus like the police and court endangers business

investments returns being siphoned away by bureaucrats and politicians.

Intellectual property Protection: Patents, trademarks and copyrights are the 3 tools by

which businesses can protect their intellectual properties. Today businesses look for low legal

risk countries to invest in and having poor IP regulatory structure can be a major setback in

the process.

Case example: India and China

IBM and Coca-Cola closed their investments in India when the government passed a law

requiring all foreign companies to enter into joint ventures with Indian companies. They felt

the risk of allowing their Indian partners to expropriate their intellectual property- their core

competencies- due to inadequate legal actions against intellectual infringements.

WTO and foreign governments are pressurizing china to respect IP rights and take actions

against the violation of trademarks. The win of Starbucks trademark lawsuit against copycat

Shanghai Xing Ba ke resembles a shift toward greater IP security for foreign companies.

IP protection EU or India

The EU, which is India's largest trading partner, has been demanding that India should

enforce a tougher Intellectual Property Rights regime particularly on pharmaceuticals. Home

to a large and sophisticated pharmaceutical industry, India manufactures vast amount of

quality generic medicines used in developing world to treat diseases like malaria, cancer,

HIV/AIDS etc. However, role of India as the the pharmacy of the developing world is now

under threat due to EU-India Free Trade Agreement.

The EU is pushing for the introduction in the FTA intellectual property chapter of measures

of IP protection that go beyond those required under Agreement on Trade Related Aspects ofIntellectual Property Rights (TRIPS). The so called TRIPS-plus provisions in FTAs have


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been demonstrated to reduce the availability of generic medicines, thus raising medicines

prices. The enactment of TRIPS-plus provisions in India would reduce the production,

domestic sale, and export of generic medicines, thereby affecting treatments of millions of

people across the developing world.

Product safety and liability: Product safety laws set some safety standards for products both

exportable and for domestic sale. Companies are liable for any harm, injury, or death caused

by the use of such product. The laws are strictly conformed in many western countries. Strict

consumer-protection rights have increased their liability insurance cost and made them less

competitive in the global market. Ethical issues such as overlooking consumer safety in

foreign countries where liability laws are more lax are also being raised. Consumer protection

is a serious concern, particularly in developing countries and regions. However, in many

countries consumer protection law is still rudimentary. For example, among SAARC

countries Bangladesh and Burma are yet to enact any legislation regarding consumer

protection. India, Sri Lanka, Nepal, Pakistan have enacted their respective consumerprotection legislation. But in contrast to NAFTA, consumer protection is much less enforced

and ensured in this region.

Legal restrictions on International Marketing: Projects operating in the international

markets have to keenly observe the countries legal environment. An initiative might fail

simply if it does not pay attention to barriers to entry, restrictions on profit repatriation, tax

laws, trade restrictions, price controls, and ad restrictions.

Ad restrictions: marketing of products vary between countries. Cultural, political and

religious effects play a very important role into deciding what sort of marketing efforts theforeign companies can undertake. For example, telecommunication giant Telenor had to

withdraw a (TVC) broadcasted in Pakistan that showed a boy connecting on Facebook with a

girl. The ad was criticized for encouraging online dating, a commonplace phenomenon in the

country. Telenor apologized and withdrew the TVC. Such cultural impacts are necessary

considerations while thinking of international marketing.

Ad restrictions also vary within nations for the same product category. In China, companies

are allowed to advertise alcohol on television as long as the product they are advertising has

alcohol content under 40%. But, in Bangladesh alcohol advertising is completely banned. In

Pakistan, due to religious motives the advertisement of contraceptives is prohibited whereas,

Chinese government encourages such ads. Since, the country has a one child per family

rule; it is easy for contraceptive companies to advertise in China.

In countries such as United States, United Kingdom, there are restrictions on advertising food

to children, particularly food which are high in fat, salt or sugar due to increasing child

obesity and health issues. There is restriction regarding production and selling of baby food

as well. Baby food can be either imported or manufactured wholly in a country, it cannot be

imported and then packaged and branded to be sold.


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In India, the Infant Milk Substitutes (IMS) act forbids the advertising of infant milk

substitutes or feeding bottles, incentives of any kind for promoting the use or sale of infant

milk substitutes or feeding bottles, free samples to mothers. It also stipulates that no container

or label of infant milk substitutes shall have pictures of an infant or a woman or phrases

designed to increase the sale-ability of the product.

In many countries such as India, Bangladesh Tobacco products cannot be advertised using

above the line channels such as mass communication media, print media etc.

In many countries in Africa, such as Sierra Leon and Angola, the sale of blood diamonds,

gems used to fund civil wars is prevalent. Such trade is deemed unethical in many developed

countries. In countries like Zimbabwe where human rights abuse among diamond mine

laborers is often reported, consumers and retailers most of the time do not know whether the

diamond has been produced with or without abuse.

International Mergers and Acquisitions

Globalization and worldwide financial reforms have collectively contributed towards the

development of international mergers and acquisitions to a substantial extent. More and more

companies, large and small, are entering into combinations that span international borders.

Some are instituting joint ventures, others are forming partnerships, and still others merging

or making outright acquisitions. Cross-border mergers and acquisitions is a large and growing

part of all Foreign Direct Investment (FDI). In an age of globalization, cross-border mergers

and acquisitions represents one of the most important means of integrating the worlds

economies.

International Acquisitions: Effects of increase in antitrust laws

The 1990s show an unprecedented increase in the number of mergers and acquisitions. The

distinguishing characteristic of this late twentieth-century wave is its global dimension. In

2000, almost 2,300 mergers were successfully completed across countries for a total value of

$740 billion. This compares to only 650 cross border acquisitions in 1990, worth $74 billion.

Since it has been demonstrated that mergers have implications on the market power of the

firms and on social welfare, it comes as no surprise that a number of new merger andcompetition laws have been introduced worldwide during the same decade. Today, there are

over 80 countries in the world with antitrust laws, of which about 45 specifically provide for

some kind of merger review.

Most of these laws have been enacted in very recent years, many in countries with no history

of competition law and with vastly different economic systems.

Cross-border mergers can allow companies to create monopolistic positions which are not

under the jurisdiction of any one competition authority. For instance, in the proposed merger

between Wilkinson Sword (UK) and Gillette (US) in 1990, 14 different agencies, includingsome outside the U.S. and E.U., were involved in oversight proceedings. In many markets,


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the proposed merger would have given the resulting single company 90% of the market. The

prevention of anti-competitive, cross border mergers is of prime interest to regulators, since

they imply a transfer of resources and control from domestic to foreign firms. National

competition laws may put controls on domestic acquisitions as well as certain cross-border

deals with domestic effects.

Case Study: Indias new competition law

The introduction of Indias new competition law has sparked great debate and analysis.

Domestic companies in India are studying the law in an effort to understand how it may

affect business operations. For Indian companies with a global footprint or international

companies with assets or operations in India, this task may be much trickier, particularly

because of the increasing penetration of competition law worldwide.

In a country like India where economic development is the key to achieving its constitutional

guarantees of an egalitarian society, freedom of trade and commerce, economic freedom,

right to life etc. A competitive market which works for the poor where firms compete

vigorously by finding better ways to produce and distribute goods and services is crucial.

India also indulges in imports of many intermediate goods and goods which are important for

its industries such as crude oil, metals and alloys. The Delhi Metro seen as an important

success in India's developmental aims, was a result of being supplied rolling stocks by a

consortium of international companies such as Hyundai Rotem, Mitsubishi Corporation and

MELCO Bombardier Inc. (headquarters in Berlin, Germany) which has orders for 424 Delhi

Metro cars worth 727 Million Dollars, is expected to an order for another 100 metro coaches

from the Delhi Metro Rail Corporation. Technology transfer arrangements have also takenplace for the manufacture of coaches in India itself. Therefore it seems that where

development projects are concerned India is not entirely self-sufficient and relies on

international assistance through trade. It would then follow that having competition law

which seeks to protect competition would allow foreign firms to compete freely and would

open doors for India's development, which is what the Indian Parliament had in mind while

enacting a competition law for India.

Trade Alliance:

Two centuries ago, Scottish economist Adam Smith and British economist David Ricardo

expressed a revolutionary belief that countries should participate in international trade as a

means of capitalizing on their individual advantages, enabling them to engage in business in a

manner that was both efficient and mutually beneficial. In the 21st century, as the global

market becomes increasingly integrated, the vision of these economists is more relevant than

ever before.

International trade plays a crucial role in the economic growth and success of countries like,

the United States. Supported by a sophisticated web of global infrastructure, bilateral and

multilateral trade agreements, and government programs, international trade has becomeincreasingly accessible to businesses and industries across several nations.


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Europe and America have formed regional trading alliances such as EU and NAFTA

respectively with many other states to facilitate trade amongst them, protect them against

collusive competition of strong nations and provide a balanced economic growth and

standard quality of life of the allied countries. The agreements also drafted out trade policies

to ensure fair participation of member nations and a higher degree of consumer protection.

Such alliances have trade directives not only for their member countries but also for the

countries the members are trading with and strict compliance to those is a prerequisite. The

regulations are at the same time enhancing trade for some nations whereas for nations like

Bangladesh are posing certain obstacles. South Asian countries have also formed alliances

such as ASEAN and SAARC for trading as well as to open dialogue on concerns of mutual

interests. Legal implications of these trade alliances encompass fields of competition, trade

barriers, tariff restrictions, intellectual property rights and consumer protection. To sketch the

legal implications of trade integration, the European Union, EUs trade policies in effect for

one of the LDCs, Bangladesh isexamined from different export

opportunity viewpoints.

EU policies and market access for

Bangladesh

Export sectors being the major

revenue generating sectors for a

developing economy like Bangladesh;

industry for leather and leather goods,knitwear, pharmaceuticals and the

shrimp processing industry was

considered to be the lead earning

sectors. Among the 25 independent

states of the European Community

(EC), five (5) of them had been

identified as the major importers of

Bangladeshi products. Access to the

market in the European Union (EU)is thought to be suffering from the

presence of many non-tariff barriers.

However, since 2001 EU has initiated

Everything But Arms (EBA) policy

for some 49 LDCs including

Bangladesh thus Bangladeshi

exporters found new opportunities to

export their products with relative

ease.

EU profile:

The European Union (EU) united Belgium,

Denmark, France, Greece, Ireland, Italy,

Luxembourg, the Netherlands, Portugal,

Spain, the United Kingdom, Germany,

Austria, Finland, and Sweden in a single

market with no national barriers to travel,

employment, investment, and trade. The EU

was formed to allow its 15 member nations

to reassert their position against the industrial

strength of the United States and Japan.

Its ultimate goal, to have common customs

duties and unified industrial and commercialpolicies, as well as a single currency and

regional central bank, faces problems

particularly over the establishment of a single

currency. EUs directives on tariff and non-

tariff barriers, intellectual property rights,

investment decisions all make a major impact

on the international trading of developing

countries.


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Figure 1: EU Trade with Bangladesh

Source: http://www.eudelbangladesh.org/en/trade/index.htm

Four categories of barriers had obstructed

small and medium sized Bangladeshi

exporters. They are Type I - government

participation in trade and restrictive

practices; Type II - technical barriers totrade or TBT; Type III - specific

limitations; and Type IV - import charges.

Of these, technical regulations, standards,

certification arrangement, rules of origin,

and labelling, marking and packaging are

the major barriers.

1. Leather and leather goods export towards EULeather and leather goods industry: the leather industry has been facing market access

barriers of the four types listed before. Of the Type I barriers; customs and administrative

entry problems called barriers related to formalities creates major barriers. Lack of adequate

knowledge and appropriate training regarding use of shipping marks and putting off

hazardous shipping labels creates misunderstanding with the respective authorities of the

importing countries which hampers smooth market access drastically and sometimes rejection

of consignments. Delays and improper surveillance of the inspection authorities in theexporting country in providing certification and other relevant documents that are complex

and costly act as strong barriers towards EU market access. Poor customs valuation

procedures are also found to create significant obstacles towards EU export. Due to poor

customs valuation procedures in the exporting country, exporters are often unsure about duty

amount which affects the overall profitability. Moreover, as an LDC, Bangladesh is enjoying

the GSP and EBA facilities but due to non-availability of chemicals (often recommended by

the importing nations) in the domestic market it is difficult for local producers to comply with

the requirements of the importing nations immediately. This ultimately acts as a barrier

towards EU market access.

The most important impediment is in terms of the Type II barriers i.e. environmental friendly

chemical usage (e.g. preservative chemical) certification. The leather product has to be AZO

free certified on health grounds due to its carcinogenic nature (strictly prohibited in Germany;

one of the major importers in EU). Many SMEs are not clear about the procedure of getting

such certification, and if they do it costs them an arm and a leg. The standards set by

importing nations act as a major trade barrier. Consignments worth thousands of dollars are

rejected even for minuscule non compliance with the set standard of chemical use.


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2. Shrimp export towards EU marketShrimp is the second most important source of export in the Bangladesh fish sector. Shrimp

processing industry has acquired a highly competitive status due to its expanding global

demand. Bangladesh exports several items in shrimp category as frozen raw shrimp and

different categories with value addition (value added shrimp) as in stick form, canned with

special processing with bread crumb (breaded shrimp), shrimp without head and legs, shrimp

with head and legs etc. All these varieties of the exportable hold unique international codes.

The major importing countries of the EU had been acquiring shrimp items from Bangladesh

at relatively lower price compare to other Asian counterparts.

The shrimp processing industry is facing problems due to the restrictions imposed on rules of

origin of the shrimp, technical regulations, standards and testing problem and labelling and

packaging procedures.

Due to insufficient production capacity of inputs such as raw shrimps at the farm level shrimp

exporters could not take advantage of the rules of origin applied in EU. It was noted in other

studies (Haque, 2004) that shrimp processing firms operate only at 13% level of capacity due

to acute shortage of raw shrimps. For exporters, relaxing the rules of origin might help them

to export more shrimps to EU and take the benefit of the EBA initiative. This means that if

Bangladesh shrimp processors could import raw materials from neighbouring countries (like

India and Thailand) then with a change in the rules of origin it could have been possible for

them to export more shrimps to EU. Complying with Technical Barriers to Trade (TBT)

provisions along with HACCP (Hazard Analysis and Critical Control Point) and criteria set

by the Food and Veterinary office (FVO) acts as a major barrier towards EU export market.Complying with these standards required adequate technical assistance and the small shrimp

firms are still struggling in adopting the standards with low production capacity and very low

yield.

Also EU restrictions are imposed on shrimp export due to presence of unauthorized

antibiotics (e.g. Nitrofural) in the produce and exploitation of usage of existing levels of the

authorized antibiotics in the form of overdose. Consignment rejection had found to be a

regular phenomenon under applicability of the standards TBT requirements.

Meeting the packaging and labeling requirements has been identified as a significant problem

towards market access. Packaging has to be tailored (based upon the importers requirements)

and perfectly sealed. Labelling and marking over each package and over the container are

mostly required to be in English (language requirements) and sometimes required to be done

according to the importing countries official languages. Any trivial errors can result in the

cancellation of the consignment thus incurring huge losses for the SME exporters.


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3. export towards EU market:Bangladesh has been exporting pharmaceutical products to less regulated overseas markets as

Srilanka, Myanmar, Nepal in the late 80s and more regulated markets as Russia, Ukraine,

Georgia and Singapore in the early 90s. Success in export in these markets shows aptitude of

the Bangladeshi pharmaceutical companies in meeting stringent regulatory requirements in

compliance with the TRIPS Agreement. As an LDC, Bangladesh would be able to

manufacture and export patented drugs until 2016. Also, Bangladesh has been enjoying the

benefits of EUs GSP and EBA initiatives. Due to EBA initiative, Bangladesh has been

granted duty-free access to the EU market without any quantitative restrictions, except to

arms and munitions. However, in addition, Bangladesh is the only LDC which possesses a

very strong manufacturing base in pharmaceuticals.

Compliance with the strict rules of origin is considered as a significant problem in the

industry for pharmaceuticals since the industry requires major imports of chemicals tofunction. European Union being a major driver of TRIPS and Public Health provisions are

found to conform to the strict conditions of the agreement and of compulsory licensing .They

have been conformed to the TRIPS provisions by recognizing and strengthening protection of

IPRs on pharmaceutical products and processes which had been causing problems for the

developing nations.

Implementation of the TRIPS agreement may lead to higher drug prices, low access and

weakening of the local pharmaceutical industries. Certification arrangement has been creating

significant problem in the industry for pharmaceuticals because of extremely high cost and

international standard requirements. International standards as of compliance with CTD(Common Technical Document) of the EU, MHRA (Medicines and Healthcare products

Regulatory Agency) of the UK have also been required. Since pharmaceutical products has

been related to public safety and health issues, the international bodies as of the EU Authority

are extremely sensitive in making any such decisions regarding the developing nations.

Concluding Observation of EU trade policies in the Bangladeshs export industry

Technical Barriers to Trade seems to be the most important barriers towards trade expansion

for the small and medium sized enterprisesin Bangladesh. This implies that technical barriers

to trade are the major stumbling block for these industries to venture into world trade. The

range of measures in this category includes technical regulations, standards, testing and

certification arrangements. Clearly, the SMEs are facing difficulty into meeting these

standards to access EU market thereby increasing their operating costs. This study further

strengthens the argument and shows that for other sectors (major export items from

Bangladesh) like, leather and leather goods, pharmaceuticals and also for the shrimp

exporters, this is an important barrier.


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Conclusion

This report, including the many cases illustrated, show the implications of national

differences in political economy on the sustainability of the business. These must be foreseen

by managers and factored into key business decisions in order to prevent the company from

collapsing.

The political, economic and legal systems of a country also determine the market

attractiveness of that country. As a result, analyzing these systems can help managers decide

whether they should invest into the country and, if yes, what strategies they should undertake.

As an LDC, Bangladesh has been enjoying the benefits of EUs GSP and EBA initiatives. Due

to EBA initiative, Bangladesh has been granted duty-free access to the EU market without

any quantitative restrictions, except to arms and munitions. However,

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