Slide 4.

Chapter 4

International politics

Alan M Rugman and Simon Collinson, International Business, 5th Edition, Pearson Education Limited 2009

Slide 4.2

International politics

Objectives
Introduction
Economic integration
The European Union (EU)
Other examples of economic integration
Economic integration and strategic management.

Alan M Rugman and Simon Collinson, International Business, 5th Edition, Pearson Education Limited 2009

Slide 4.3

Introduction
Over the last few decades there has been a
dramatic change in the political systems of many
countries.
In particular, there has been a move towards
market-driven economies in Eastern Europe and
China.

Alan M Rugman and Simon Collinson, International Business, 5th Edition, Pearson Education Limited 2009

Slide 4.4

Political ideologies and economics

Political systems
Democracy: A system of government in which the
people directly or through their elected officials,
decide what is to be done.
Totalitarianism: A system of government in which
one individual or party maintains complete control
and either refuses to recognize other parties or
suppresses them.

Alan M Rugman and Simon Collinson, International Business, 5th Edition, Pearson Education Limited 2009

Slide 4.5

Political ideologies and

economics (Continued)
Economic systems
Market-driven economy: An economy in which
goods and services are allocated on the basis of
consumer demand.
Centrally determined economy: An economy in
which goods and services are allocated based on
a plan formulated by a committee that decided
what is to be offered.
Mixed economies: Economic systems
characterized by a combination of market-and
centrally-driven planning.
Alan M Rugman and Simon Collinson, International Business, 5th Edition, Pearson Education Limited 2009

Slide 4.6

Government control of assets

Privatization: The process of selling government
assets to private buyers.
Divestiture: A process by which a government or
business sells assets.
Contract Management: A process by which an
organization (such as the government) transfers
operating responsibility of an industry without
transferring the legal title and ownership.

Nationalization: A process by which the

government takes control of business assets,
with or without remuneration of the owner.
Alan M Rugman and Simon Collinson, International Business, 5th Edition, Pearson Education Limited 2009

Slide 4.7

Government control of assets

Reasons for Privatization:
Increase efficiency
Change in political culture brings about desire to
sell off these assets
More to be gained by selling a profitable company
To reduce national debt
Company is losing money
Company needs funds for R&D
To get assistance from international funding
agencies
Alan M Rugman and Simon Collinson, International Business, 5th Edition, Pearson Education Limited 2009

Slide 4.8

Government control of assets

Reasons for Nationalization:
Promoting economic development, coordinating
assets of many businesses into one master plan
Earning profits for national treasury
Preventing companies from going bankrupt
Enhancing programs that are in the national
interest
Increasing political or economic power of those in
control
Ensuring goods and services to all citizens
regardless of economic status
Alan M Rugman and Simon Collinson, International Business, 5th Edition, Pearson Education Limited 2009

Slide 4.9

Government business cooperation

Although governments are privatizing assets,
this does not mean that they are not involved in
business.
Business-government cooperation continues to
be beneficial, particularly in the EU and Japan.

Alan M Rugman and Simon Collinson, International Business, 5th Edition, Pearson Education Limited 2009

Slide 4.10

Economic integration
The establishment of transnational rules and
regulations that enhance economic trade and
cooperation among countries.

Alan M Rugman and Simon Collinson, International Business, 5th Edition, Pearson Education Limited 2009

Slide 4.11

Trade creation and diversion

Trade creation: A process in which members of
an economic integration group begin to focus
their efforts on those goods and services for
which they have a comparative advantage and
start trading more extensively with each other.
Trade diversion: A process in which members of
an economic integration group decreases trade
with non-member countries in favor of trade with
each other.

Alan M Rugman and Simon Collinson, International Business, 5th Edition, Pearson Education Limited 2009

Slide 4.12

Levels of economic integration

Free Trade Area: barriers to trade (such as tariffs)
among member countries are removed (e.g.
NAFTA).
Customs Union: tariff between member countries
are eliminated and a common trade policy toward
nonmember countries is established.
Common Market: elimination of trade barriers
among member countries, a common external
trade policy and mobility of factors of production
among member countries.
Alan M Rugman and Simon Collinson, International Business, 5th Edition, Pearson Education Limited 2009

Slide 4.13

Levels of economic
integration (Continued)
Economic union: A deep form of integration
characterized by free movement of goods
services, and factors of production among
member countries and full integration of economic
policies.
Political union: An economic union in which there
is full economic integration, unification of
economic policies and a single government.

Alan M Rugman and Simon Collinson, International Business, 5th Edition, Pearson Education Limited 2009

Slide 4.14

Economic Integration: An overall

perspective
Not necessary for a country to pursue economic
integration starting with a free trade area
Economic integration in the form of free trade
results in a winning situation for all group
members
Bloc members can achieve internal and external
economies of scale
Results in all bloc countries becoming more
efficient in the long run.

Alan M Rugman and Simon Collinson, International Business, 5th Edition, Pearson Education Limited 2009

Slide 4.15

Ethics, environment,
MNEs and the civil society
The civil society is a group of individuals,
organizations and institutions that act outside the
government and the market to advance a diverse
set of interests, including opposition to global
business.
Non-governmental organizations (NGOs) are
private-sector groups that act to advance diverse
social interests.

Alan M Rugman and Simon Collinson, International Business, 5th Edition, Pearson Education Limited 2009

Slide 4.16

The European Union: formation

European Coal and Steel Community (ECSC):
A community formed in 1952 by Belgium, France,
Italy, Luxembourg, the Netherlands and West
Germany.
European Union (EU): A treaty-based institutional
framework that manages economic and political
cooperation among its 27 member countries.
European Free Trade Association (EFTA): A
free trade area currently consisting of Iceland,
Liechtenstein, Norway and Switzerland.
Alan M Rugman and Simon Collinson, International Business, 5th Edition, Pearson Education Limited 2009

Slide 4.17

The European Union: organization

European Council
Council of the European Union
European Commission
European Parliament
Court of Justice
Court of Auditors.

Alan M Rugman and Simon Collinson, International Business, 5th Edition, Pearson Education Limited 2009

Slide 4.18

Figure 4.1

The European Unions institutions

Alan M Rugman and Simon Collinson, International Business, 5th Edition, Pearson Education Limited 2009

Slide 4.19

Other examples of economic

integration
Andean Community: An economic union that
consists of Bolivia, Colombia, Ecuador, Peru and
Venezuela.
Mercosur: A free trade group that consists of
Argentina, Brazil, Paraguay and Uruguay.
ASEAN: Founded by Indonesia, Malaysia, the
Philippines, Singapore and Thailand.
FTAA: A free trade agreement of the Americas
that has not yet been implemented.

Alan M Rugman and Simon Collinson, International Business, 5th Edition, Pearson Education Limited 2009

Slide 4.20

Economic integration
and strategic management
A strategic alliance is a business relationship in
which two or more companies work together to
achieve a collective advantage.
These alliances can take a number of forms:
research cooperation;
marketing cooperation;
licensing of a product or technology for a specific
market region.

Alan M Rugman and Simon Collinson, International Business, 5th Edition, Pearson Education Limited 2009

Slide 4.21

Localization of business operations

MNEs must adapt their offering, their expectations
and the way in which they do business to each
market in which they operate.
These efforts result in the localization of business
operations and typically focus on four areas:

Products
Profits
Production
Management.

Alan M Rugman and Simon Collinson, International Business, 5th Edition, Pearson Education Limited 2009