Global financial markets and the politicallegal environment

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Global financial markets and the political-legal
environment

• The Global Business Environment
• MIM Oct 8-10, 2007
• Wille Barner-Rasmussen

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Agenda for Oct 8-10

• (Global) financial markets
• Political environment
• Legal environment
• Focus on the MNC and its links to these

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One possible framework
Global financial markets
HQ
Sub
Sub
Sub
Sub
Sub
Sub
National political and legal environments Supranat
ional political and legal environments
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Actors

• Global financial market actors
• MNC top management/HQ
• MNC units/subsidiaries and their employees
• National political and legal actors
• Supranational political and legal actors
• What characterizes each group? Who are these
  actors and what is important to them?

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Global financial market actors

• Actors Banks, stock markets, private equity
  firms, pension funds, investment funds, hedge
  funds, analysts, CFOs of big firms, wealthy
  individual investors
• Provide/control financial assets and markets
• Focused on investment returns
• Buckley Ghauri (2004) financial markets are
  global almost by definition ? capital moves
  fluidly across borders looking for optimal
  combinations of risk and ROI
• Borderless, faceless capital
• Note role of national/regional/international
  watchdogs and regulatory bodies

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MNC top management/HQ

• Top managers of large firms (CEOs, directors,
  decision-makers, strategists)
• Used to thinking globally considerable
  decision-making power and responsibility risk
  neutral (?)
• Their jobs depend on meeting stockholder
  expectations in terms of creating value
• Often listen closely to owners, investment
  bankers, financial markets, strategy consultants,
  international business press
• Depending on firm strategy, may approach
  subsidiaries as stocks in a portfolio or as parts
  of an integrated whole
• Are only human after all

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MNC units and their employees

• MNC units are embedded in diverse national
  environments (national business systems)
• Usually relatively small in relation to parent
  MNC
• Backgrounds range from greenfield FDI to old,
  slowly acquired local firms
• Operations usually reflect local practices
• Are more affected by national changes, more
  concerned about protecting local jobs
  optimizing position on local market
• Natural important part of activities is to keep
  close links to relevant local institutions and to
  monitor local competition
• Employees (including most managers) are host
  country nationals
• Managerial cadre may be inculcated in corporate
  way

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National political/legal actors

• National governments and political opinion-makers
• National competition authorities and watchdogs
• National legislation on everything from FDI to
  employee representation
• Different national institutional environments
  work in different ways ? varieties of
  capitalism (or totalitarianism)

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Supranational political/legal actors

• Some examples
• UN, EU, WTO, ASEAN, NAFTA, International Court of
  Justice, International Accounting Standards
  Board...
• Exist to advance the interests of their
  constituencies by setting rules and regulations
  in some cases also enforcing these
• Often hobbled by internal conflicts of interest
  (stemming from members differences of opinion)
  need for consensus decision-making
• However, have considerable symbolic importance
  and in some cases also real power
• Not to forget relevant others, e.g. activist
  networks, international trends such as
  environmentalism, and the media.

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Interfaces between actors

• Global financial market actors MNC top
  management
• MNC top management MNC subsidiaries
• MNC subsidiaries national political and legal
  actors
• MNC top management national and supranational
  political and legal actors

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GFM actors top managers

• Recall Birkinshaw et al. (2006) on HQ relocation
• Star CEOs and CEO hubris
• Going public is a big step for a firm
• Financialization, growing short-termism
• Widening gap owners-management
• MA waves, pressure to grow and have a story to
  tell the market restructuring challenges
• Access to capital ? Nokia on NYSE, Wärtsilä in
  London, Metso delisting
• Forms of financing
• Top management is under strong pressure to cater
  to financial markets a lot of their work aims
  to make sure their firm is seen as an attractive
  investment
• GFM put severe pressure on top managers
• Top managers compensation often tied to market
  value of company (stock options)

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MNC top managers subsidiaries

• Financialization, growing short-termism
• Widening gap management-units
• Restructuring challenges layoffs in
  subsidiaries often motivated with corporate
  profitability needs
• Splitting up, slicing dicing, relocating
  pressures
• Units may be bought and sold several times
• Cynicism mistrust
• Profitability pressures, control efforts
• Subsidiaries remain embedded in their own local
  environments and can draw on local resources to
  fight the HQ
• Kristensen Zeitlin (2006) the difficulty
  (impossibility?) of implementing a transnational
  strategy against the will of subsidiaries.

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Subsidiaries national actors

• Issue of legitimacy
• Subsidiaries are subject to national laws
• Subsidiaries are mainly staffed with local
  nationals and are, in that sense, local actors
• Subsidiaries often draw on local resources and
  institutions to fight the parent MNC
• Buckley Ghauri 2004
• National locations remain distinctive/
  differentiated
• MNC subsidiaries remain firmly embedded in their
  local economy
• A great many resources are local in character

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MNC management national actors

• National governments may be protective of crown
  jewels (example of Nokia)
• A country can influence the competitiveness of
  MNCs residing there e.g. through taxation,
  infrastructure, educational system...
• National governments vs large firms a
  tenant-landlord type of relationship?
• MNCs can influence national actors e.g, Tainio
  and Lilja (2003) on changes in Finnish national
  business system
• BP in Russia ? authoritarian or unreliable
  governments increase business risk considerably

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The transition of the Finnish national business
system

• Until 1980s Collaborative business system,
  central role of state
• Early 1990s banking groups disappeared,
  corporate governance system strengthened
• Owner control increasingly exercised through
  arms-length financial markets
• Decreased discretion of CEOs, top management
  teams increased board control
• Large corporations withdrew from local
  paternalistic responsibilities (slowly since
  1960s), focused their portfolios, created
  transnational capabilities
• Decreased role and dominance of state
• Emergence of large, liquid financial markets
• Collective bargaining complemented by incentive
  schemes outside the control of trade unions
• Key firm-level actors Nordea, Nokia, UPM, Stora
  Enso
• Conclusions
• Change in Finnish business between early 90s and
  early 00s driven by local managers and global
  investors.
• The management teams of leading companies have
  been able to establish new institutional
  patterns.
• At the same time, the relative power of firm top
  managers has decreased due to the focus on
  shareholder value.

Source Tainio Lilja 2003
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MNC management supranational actors

• E.g., Microsoft vs EU
• Regional policy decisions, such as those by the
  EU, may touch MNCs in different ways (fortress
  or liberalization)
• E.g., a fortress policy may motivate
  outsiders to try and become insiders in that
  particular region by FDI (e.g, Japanese auto
  manufacturers in Europe)
• MNCs lobby supranational actors both directly
  (Brussels the lobby capital of Europe!) and
  indirectly (e.g. through national governments,
  international industry organs)

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Political environment
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Political economy and national differences

• political, economic, and legal systems of a
  country are interdependent they interact and
  influence each other (Hill 2007, p. 44)
• MNCs are part of the political economy of a
  nation influence as well as are influenced by it
• a nations political economy affects the
  benefit-cost-risk trade-off of doing business
  there (Hill 2007, p. 81)
• Countries differ in terms of
• level of economic development
• ownership of economic resources market-based,
  command (state-owned), transitional/mixed
• economic growth and stability
• These differences need to be taken into account
  when assessing the attractiveness of a country as
  a location

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Political risk what is it?

• governmental or societal actions and policies,
  originating either within or outside the host
  country, and negatively affecting either a select
  group of, or the majority of, foreign business
  operations/ investments. (Simon 1982)
• ie 1) beyond government 2) external vs internal
  risk 3) micro vs macro risk 4) not synonymous
  with instability
• it is often impossible to parse out the
  political, social and economic causes of risk
  (Oetzel et al. 2001, p. 129) concept of country
  risk

Slide courtesy of Dr Catherine Welch
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Political risk and factors influencing it the
host governments role

• setting the rules
• legal system, e.g. Ownership requirements,
  repatriation limits, personnel regulations,
  contract law, tariffs, import quotas, export
  incentives, exchange rates, Intellectual Property
  Rights (IPR) regulations, health safety, labor
  law. - but also the unofficial rules of the game
• potential customer
• potential competitor
• provider of services
• Infrastructure, loans, etc.

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What governments tend to want

• Foreign exchange
• More exports than imports
• New technology
• Development of specific industrial sectors
• Access to capital
• Higher tax revenue
• Local content and sourcing
• Local ownership and control
• Domestic control of national resources
• Development of backward areas
• Prestige and sovereignty

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How to address host government concerns

• Recognise and acknowledge governments as
  legitimate entities
• View the process within a negotiation framework
  and aim for a win-win arrangement
• Note that under most circumstances your
  bargaining power is highest prior to rather than
  after you make an investment
• Note that your ability to drive a hard bargain
  weakens if there are more than two or so firms in
  your industry wanting to operate in a particular
  region or country
• Split your operations vertically across regions
  keeping if possible the most critical stage out
  of reach of unreasonable or unstable governments

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How to address host government concerns (2)

• Develop centres of competence in the major
  markets you operate in so as to be local as well
  as global
• But in so doing, take steps to ensure that the
  network can operate flexibility by shifting
  operations across countries
• Build relationships with the home government so
  that they can bat for you
• Support liberal multilateral trade and investment
  regimes (because they help make the business
  environment more predictable and less arbitrary)
• Consider dealing with multiple actors, including
  local officials and opposition parties
• Develop political competencies in your
  organization!

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Some implications of political economy
characteristics for business

• Risks
• Political Legal
• Economic
• Ethics
• Human rights
• Corruption

• Attractiveness Benefits
• First-mover advantages?
• Costs

Ambitions/Objectives in the country? Choice of
operational mode? How to operate?
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Preferred strategic posture
Minimum financialexposure Minority joint
venture, licensing
Maximum commitment wholly owned affiliate
Own subsidiaries
MARKET ATTRCTIVENESS
High commitment wholly owned affiliate
Limited presence
Joint venture
Export sales agent Licensing
Occasional exports
Independent distributor
POLITICAL INVESTMENT CLIMATE
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Responding to the political system
POLITICAL (NON-MARKET) STRATEGIES - lobbying -
mobilisation, coalition building - political
donations - public advocacy - good citizenship
actions

• MARKET-BASED
• STRATEGIES
• adjust level of market commitment (exit?)
• invest in political risk assessment and insurance
• create business alliances
• change product focus
• localise staff

Slide courtesy of Dr Catherine Welch based on
Baron (2000)
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Legal environment
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Differences in national legal systems

• (1) Type of legal tradition
• common law body of law built through case law
  ie. accumulation of judge-made binding precedents
• civil law comprehensive legal codes the basis
  for system case law guidance only
• non-Western eg. Islamic law, tribal law
  (customary law)
• ? Affects e.g. how contracts are drafted and
  enforced (Hill 2007, pp. 51-52)

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Differences in national legal systems

• (2) Stability/effectiveness of legal system
• rule of law supremacy of law over government and
  citizens
• principle of equality before the law
• independence of judiciary/degree of corruption
• judicial system load (potential delays)/costs
• implementation/enforcement of laws/regulations
• extent of appeals procedure
• ? Affects legal risk i.e. likelihood that legal
  rights are not upheld (see Hill 2007, p. 80)

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Common legal risks

• Contractual risks in overseas markets ie. risk of
  contract being broken/nullified
• Violation of property rights, including
  intellectual property
• Risks of liability for injuries or defective
  products, and subsequent litigation
• Risk of infringement of data protection
  requirements (importance to e-commerce)
• Risks of corruption (and extraterritorial
  corruption prevention measures e.g. OECD
  anti-bribery convention)

Hill 2007, pp. 52-59
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Piracy a significant problem in international
business

• Confidentiality in business partnerships (JVs)
  major concern ?
• insist on confidentiality clauses in contracts
• license only to the joint venture, not to the
  partner
• wholly-owned subsidiary rather than joint
  venture?
• withhold advanced technologies
• limit the no. of people with access to key
  documentation
• educate the workforce on the importance of
  technology protection
• Enforcement?
• Administrative Most common (e.g. Administration
  for Industry Commerce responsible for trademark
  law) agencies do raids, give fines
• inexpensive, fast
• Civil enforcement
• may deter others
• - expensive, low awards, judiciary independent?,
  difficult to collect damages
• Criminal enforcement Least common
• potentially lower costs than civil enforcement
  - are cases pursued?
• ...or Mediation?

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Thanks!