Political and administrative framework of business

VWL (Fach) / Political and administrative framework of business decisions (Lektion)

In dieser Lektion befinden sich 38 Karteikarten

Mündliche Prüfung VWL, Part 1 (Theorie)

Diese Lektion wurde von lenchen3 erstellt.

Lektion lernen

Diese Lektion ist leider nicht zum lernen freigegeben.

Why do we look at the factors in this chapter? Even though the factors are not related to the pure economic sphere, they can change the investment calculation considerably.
Which types of business decisions do we look at in this chapter? 1) A company is evaluating different country locations for starting a FDI. 2) An inverstor wants to invest in government bonds of different foreign countries.
Describe political risk. Possibility that political framework conditions can change leads to situations in which the original assessment of an investment opportunity might be changed (better/worse). These changes resulting from political decisions lead to political risk. --> Result of actions of the government.
Which types of political risk exist? Hard and soft political risk.
Describe hard political risk and name some forms. Description: Hard political risk can lead to the loss or the partial loss of capital. Forms: -expropriation of a company or parts of it (2004: Philippine Government --> Fraport) -nationalization of a company -forced local shareholding -payment default (like in Argentina 2002)
Describe soft political risk and name some forms. Description Soft political risk can lead to a change of the profitability of a business or of a bond. Forms -price controls -foreign exchange rate policy changes -policies on remittances and transfer of proftis -any changes in corporate taxation policies -local content requirements -non-respect of intellectual property rights -indigenization of management
How can investors compare political risks of different countries? They can use the assessment of private companies.
Why is it important to closely observe changes in the political environment? Because many political changes come quite unexpectedly.
Describe social risk (=instability risk) and name some forms. Description Social risk is not caused by actions of the government but by the activities of groups within one country (trade unions, ethnis groups or organized crime). It can affect the capital of a company or its profitability. Forms -Civil war -Ethnic fights -Urban riots -Kidnapping -Sabotage -Many unorganized strikes
What is the difinition of corruption according to Transpareny International? The abuse of public office for private gain.
Who is affected by corruption? Not only the companies operating in a given country, but also the people and the government.
What are the negative consequences of corruption? -Businesses can calculate less well & costs of business increase in an unpredictable way. -Businesses can lose contracts to bribe paying competitiors (despite best offer!) -Governments become less impartial --> highest bribe decides, not skills/right/law -Cost of government increase (not considering cheaper alternatives) -Creates a culture of impunity, particulary when judiciary is also prone to corruption -Trust in government gets lost -Leads to lack of supervision of contracts (poorly constructed buildings or unsafe drugs) -Negative impact of the willingness of investors to invest in such countries
Who is especially affected by corruption? Usually effects the poor more than the rich (Have to pay bribes twice as much as rich) No access to health care/education because of their lacking capacity to pay required bribe.
Why are there no objective data on corruption? Because it is executed in secret. The data provided would come from the government and - because of corruption - they would be biased, too.
What is done to measure corruption? Surveys are conducted.
Which report is published annually by the NGO Transparency International and since when? Corruption Perception Index since 1995.
1) What is the Corruption Perception Index based on? 2) What kind of indicator do we have here? 1) On the perception of people interviewed in the countries covered by the surveys. 2) A composite indicator combining the results of selected independent surveys on the curroption in a given country.
How is the level of corruption presented in the CPI? On a scale from 100 (highly clean) to 0 (highly unclean).
Describe the methodology for the calculation of the Corruption Perception Index. 1) Reliable surveys are identified for a given year. 2) Results of these independent surveys neet to be rescaled to the needs of TI. 3) Different results need to be aggregated into one composite indicator. 4) A measure for uncertainty needs to be added.
Name 3 of the 12 sources that were used in the 2014 Corruption Perception Index. -African Development Bank -Bertelsmann Foundation -IMD World Competitiveness Yearbook 2014
Which affects did the activities of Transparency International have? Led to much more transparency of corruption, created awareness among international organizations & businesses and have caused politicians & people in many countries to reduce the level of corruption.
What does the World Bank do in the Doing Business Report? It is an exercise to better capture the regulatory environment of a small/medium sized domestic enterprise in the major city of a certain country.
What has been done for very populous countries in the doing business report? A second city has recently been added to investigation.
What is the Doing Business Report looking at? At the whole life cycle of an enterprise from its creation to its end.
What is the Doing Business Report NOT looking at? At the regulatory environment of international firms wanting to start a FDI.
Name the phases that are looked at in the Doing Business Report. 1) Start-up 2) In getting location 3) In getting financing 4) In daily operations 5) Thing go wrong
Name the areas in start-up in the Doing Business Report. 1. Starting a business.
Name the areas in getting a location in the Doing Business Report. 2) Dealing with construction permits. 3) Getting electricity. 4) Registering property.
Areas of getting financing in the Doing Business Report. 5) Getting credit 6) Protecting minority investors
Areas of daily operations in Doing Business Report? 7) Paying taxes. 8) Trading across borders. 9) Labor market regulations.
Areas of things go wrong in the Doing Business Report? 10) Enforcing contracts. 11) Resolving insolvency.
On which elements are the standard case scenarios for these areas based on? 1) Number of procedures to obtain the desired result based on the existing laws and regulations. 2) Time to complete the procedures based on time and motion studies. 3) Cost involved in getting the result, usually calculated relative to the per capita income of the country in question or the value of the property.
What has been added recently in the Doing Business Report? For some areas additional indices have been constructed --> present a more complex picture (e.g. extent of conflict of interest regulation to measure the protection of minority investors)
Which aspects are NOT covered by the scenarios of the Doing Business Report? -Security & Corruption -Macroeconomic and financial stability -Skills of people -Strength of insitutions
What is the Doing Business Report generally based on? Objective facts.
What are the negative aspects of the Doing Business Report? -Looks critically at regulations & taxes --> Regulations are a burden to business, but also ensure a certain quality of i.e. building standards (safety) and taxes are a cost to the business, but government can provide certain services only with a sufficient tax base (education/infrastructure). -Focus on quantitative data --> Quality of the provided services connot be properly assessed, i.e. an easy electricity connection might not ensure a reliable electricity supply. -Regulations the survey assesses can be avoided by some firms thorugh bribes/polit. connections -Evaluates situation of local small/medium scale businesses, but does not take into account the situation of foreign investors planning a large FDI --> may get special treatment by the authorities -Overall positive rankings of a given country might not apply to all areas --> Singapore: No. 1 in overall survey & trading across borders, but 24 in registering property --> Guatemala: Overall on rank 73, but rank 12 in getting credit & 155 in resolving insolvency
What has the Doing Business Report led to? To considerable pressures on some countries to improve their regulations. --> Impressive changes & great progress in Eastern European and Central Asian countries --> Many EU countries affected by the financial and debt crisis reformed their regulations considerably and improved their ranking a lot.
When is the political risk high? When the predictability for political changes is low.