Tutorial 3 Answers

1. Critical Thinking & Discussion Questions (Textbook, p8!" 1#$

1. A %e&ocratic political s'ste& is an essential con%ition (or
sustaine% econo&ic progress. Discuss.
This )uestion has no clear#cut answer. In Australia, we tend to
argue that democracy is good for economic progress. This argument
is largely predicted on the idea that innovation is the engine of
economic growth, and a democratic political system encourages
rather than stifles innovation. Additionally note the contrast
between India & China.
*. +lobalisation is an i%eolog' o( supporting liberal econo&ics an%
corporate interests as it pro&otes weakening tra%e unions,
re%ucing business regulation an% curbing public spen%ing an%
wel(are bu%gets. Discuss.
Globalisation as a right leaning ideology would advocate the potential
benefits of globalisation and its potential in terms of economic and
social development. The conditions needed to realise this potential
are the basic principles and values that underpin the democratic
mar!et economy model.
"eft leaning critics of globalisation, as contained in the #uestion
statement, see! a fairer and more inclusive globalisation. The critics
would argue for greater emphasis on the social dimension of
globalisation, shifting priorities from a narrow preoccupation with
mar!ets and commercial interests to a broader preoccupation with
people, social issues and ine#uities. "eft leaning critics would argue
for good governance, effective social safety nets, the provision of
public services such as health and education, the public provision of
essential services such as water and electricity, the protection of
wor!ers rights and standards, and the li!e.
3. ,hat is the appropriate role o( go-ern&ent in business
acti-ities. /xa&ine this role (ro& %i((erent i%eological
perspecti-es.
This )uestion has no clear#cut answer but rather it builds on $%. A
left leaning ideology would support active government intervention
to correct privately motivated business decisions and the mar!et
failures. It would support government ownership, planning and
coordination of investment in essential large&scale infrastructure,
and government, top&down decision ma!ing on how best to allocate
scarce resources and redistribute wealth. A right leaning ideology
supports a minimal role for government. Government policy needs to
be mar!et friendly and create a climate for private enterprise'
that is, government has to supplement the mar!et, not supplant it.
0. ,hat are the %i((erences between ci-il law, co&&on law an%
theocratic law.
This is amply covered in both the lecture slides & in the te(tboo!.
. 1s a countr' 2usti(ie% in using extraterritorialit' to regulate the
business o( the (oreign subsi%ies an% a((iliates o( its 34/s in
(oreign countries.
An )*+ must comply with domestic laws at home and foreign laws
abroad. )any of its foreign operations however may also be sub,ect
to its home, domestic laws, i.e., e(traterritoriality. Governments
wishing to promote their foreign policy agenda or civil society groups
wishing to advance social ,ustice outcomes from globalisation could
find ,ustification for e(traterritoriality -e.g., to ensure adherence
to sanctions, preventing race&to&the&bottom outcomes with respect
to corruption, the environment or wages and wor!ing conditions..
1&portantl' 'ou shoul% un%erstan% that extraterritorialit' is
applie% in Australia with respect to corruption & briber'.
$. The e-i%ence see&s to suggest that expropriation an%
con(iscation occurs less (re)uentl' to%a' than pre-iousl', the
5ene6uelan experience asi%e (see 7pening Case!. ,hat changes
ha-e occurre% in the global political s'ste& that &ight explain
this tren%.
In order to remove the limitations of their own economies,
developing countries and emerging mar!et economies re#uire access
to new mar!ets for their products and the resources and
technologies to develop their own resources and mar!ets. The /0I
of )*+s is one means of gaining sufficient investment and
technological resources as well as access to foreign mar!ets to
enable economies to develop and ta!e advantage of globalisation. The
threat of nationalisation would severely reduce the inflow of such
beneficial /0I.
*. 7utline three &etho%s businesses can use to &anage political
risk.
-1. Adaptation involves incorporating ris! into business strategies'
often with the help of local officials. Companies can incorporate ris!
by establishing local e#uity and debt, locali2ing operations, offering
development assistance, establishing partnerships, and obtaining
insurance.
-%. Information gathering involves monitoring and even trying to
predict political events that could threaten local operations and
future earnings.
-3. Influencing local politics involves influencing local politics in the
companys favour by proposing changes that positively affect their
local activities, often through lobbying.
3. Closing Case (Textbook, p8$ 8 88!" 1 8 3 & 8 $
9u&&ar'
The closing case describes the challenges facing businesses in coup&
prone /i,i where democratically elected governments have been
ousted. It illustrates the sources, both domestic and foreign, and
the types of political ris! to which business is e(posed and the cost
to business and the economy as a conse#uence of the political
upheavals. The gold mining industry because of its importance to the
/i,ian economy is identified as one industry that is particularly
susceptible to political intervention. A comparison can be made to
the sources and types of political ris! e(posures of foreign business
of the 4ene2uelan situation described in the 5pening Case.
1. ,hat t'pes o( political risk are encountere% b' (ir&s
operating in coup#prone :i2i.
The case illustrates all types of ris!'macro&political ris! as the
general political and economic instability will affect all businesses6
micro&political ris! as certain political interventions are targeted at
the gold mining industry and the gold miner, +mperor )ines. The
occupation of the 4atu!oula mine by the military e(posed +mperor to
ownership and control ris!. The inability to continue the assessment
of viable ore bodies and possible recapitalisation of mine operations
e(posed the firm to operations ris!6 and the imposition of e(change
rate controls by /i,is central ban! e(posed foreign&owned
businesses such as +mperor and )ar! 5ne Apparel to transfer ris!.
*. ,h' &ight the :i2ian econo&' an% other s&all islan%
econo&ies be %escribe% as -ulnerable.
7mall island economies are vulnerable because of the limited si2e of
their domestic mar!ets, their lac! of an abundance and diversity of
natural and capital resources, their reliance on a narrow range of
production and e(ports -usually natural resource&intensive and
uns!illed labour&intensive e(ports.. The growth and stability of their
economies are thus dependent on forces over which they have little
control.
3. Countr' risk ratings are base% on anal'sing a range o(
-ariables to %eri-e an o-erall rating o( political risk. 1%enti('
an% %escribe speci(ic -ariables in the case stu%' that coul% be
use% to )uanti(' political risk in :i2i. A publishe% risk rating
gui%e such as 1C;+ &a' help i%enti(' the -ariables.
There are numerous economic, social and political factors that one
could attempt to #uantify. The fragile, dependent state of the
economy outlined in the previous #uestion could be measured, for
e(ample, in terms of the composition and direction of e(ports and
imports, the relative si2e of /0I to the stoc! of investment and the
industrial structure of the economy. 7ocial factors to consider could
include the ethnic ma!eup of the population, the distribution of
income and the incidence of poverty, changing communal structures
and internal migration.
.
Does the %egree o( political risk -ar' accor%ing to the nature
o( business. :or exa&ple, in :i2i, woul% the le-el o( exposure
%i((er i( the business was a bank, gar&ent &anu(acturing,
gol% &ining an% &ineral exploration co&pan'. <'pothesise as
to what (eatures o( a business &a' raise or lower the le-el o(
its exposure to political risk.
The nature of the business would most li!ely impact on the degree of
ris! e(posure. Gold mining and mineral e(ploration are fi(ed to the
location of ore bodies. 8an!ing and garment manufacturing on the
other hand are more mobile than mining operations and as a
conse#uence can manage ris! e(posure by relocating. The importance
of the business to the economy may be another factor. Gold mining
and garment manufacturing are important to the /i,ian economy as
earners of foreign e(change and the providers of employment. The
importance of the industry to the economy, however, may be of little
comfort to a privately owned business. There is probably more
chance of losing ones gold mining business than losing entirely ones
ban!ing business or garment&ma!ing business.
$. <ow woul% 'ou rate the relati-e bargaining power o( the :i2ian
&ilitar' go-ern&ent an% /&peror 3ines =i&ite% with respect
to %eter&ining the nature an% extent o( the go-ern&ent>s
(uture inter-ention in /&peror>s :i2ian gol% &ining operations.
Gold production and gold e(ports are important to the /i,ian
economy and it would be in the interest of /i,i to maintain and
increase foreign investment in the gold industry. Conse#uently,
+mperor would en,oy bargaining power.
In the case of the /i,ian government, they ultimately had the power
to nationalise the mine and continue its operations themselves.
0oubts e(ist, however, as to whether they had the resources and
e(pertise to recapitalise and revitalise the aging mine and whether
there was an alternative operator to +mperor for the mine. Given
the need to garner popular support for the coup and the threat to
the livelihood of near %999 wor!ers -in a total national population of
less than :99 999., time was not on the side of the /i,ian
government.
If there was no alternative operator willing to ta!e the mine over
from +mperor, it would appear the bargaining strength lay with
+mperor if it wished to maintain its gold mining operations in /i,i.
0. <ow &ight the 1nternet change totalitarian political s'ste&s,
such as China an% 4orth ?orea. ,hat &ight the 4et>s (uture
expansion &ean (or nations with theocratic s'ste&s ((or exa&ple,
1ran!. ,hat changes &ight technolog' bring to the wa' that
%e&ocracies (unction.
Control of information and a state&run media that biases news
reports in their favour help totalitarian leaders remain in power. The
Internet is ma!ing it more difficult for leaders to maintain absolute
control. Theocratic states sometimes also rely on a closed media
that is controlled by the government. At the very least, they censor
much incoming programming to weed out what the government
considers immoral. The Internet is also ma!ing it more difficult for
theocracies to restrict access to information that is not created by
or permitted by the government.
The Internet may also radically alter the way that democracies
function. /or instance, with the necessary infrastructure, online
voting for the masses could soon become a reality. )any ;7 states
are loo!ing into online voting for state elections but are being
cautious out of concerns over fraud. 8ecause online voting may ma!e
it easier for many citi2ens to vote, it could spar! greater use of
referendums. This could ma!e many representative democracies
closer resemble pure democracies'in which all citi2ens are involved
in most decisions.