International BusinessInternational Business

Chapter ThreeChapter Three

The Political and Legal The Political and Legal Environments Facing BusinessEnvironments Facing Business

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Chapter ObjectivesChapter Objectives Discuss the different functions political Discuss the different functions political

systems performsystems perform Compare political regimes and how they Compare political regimes and how they

influence managerial decisionsinfluence managerial decisions Describe how management formulates Describe how management formulates

and implements strategies to deal with and implements strategies to deal with differing political environmentsdiffering political environments

Study different types of legal systems and Study different types of legal systems and relationshipsrelationships

Exam major legal issues in international Exam major legal issues in international businessbusiness

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Political SpectrumPolitical Spectrum

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Introduction

The role of the political system is to integrate the various parts of its society into a viable, functioning whole.

It also influences the extent to which government intervenes in business, and the way in which business is conducted domestically and internationally.

The Functions of the Political ProcessThe Functions of the Political Process

Interest ArticulationInterest Articulation Interest AggregationInterest Aggregation Policy MakingPolicy Making Policy Implementation and Policy Implementation and

AdjudicationAdjudication

IndividualismIndividualism

The general orientation within a society concerning the primacy of the rights and role the individual versus that

of the larger community.

Individualism:

Political officials and agencies have a limited role in society.

Make and apply regulations to correct market inefficiencies: accessibility to information, promoting fair and just competition.

Government is detached from and independent of the day-to-day practices of business in an individualistic society.

CollectivismCollectivism

Government officials should intervene in the structure of industries, conduct of companies, and actions of managers to ensure they benefit society.

Setting up formal and informal partnerships with the business community to develop successful companies.

Governments are highly connected to and interdependent with business.

DemocracyDemocracy Freedom of opinion, expression, press and Freedom of opinion, expression, press and

organizationorganization ElectionsElections Limited terms for elected officialsLimited terms for elected officials Independent court systemIndependent court system

• High regard for individual rightsHigh regard for individual rights• Respect for propertyRespect for property

Nonpolitical bureaucracy and defense Nonpolitical bureaucracy and defense infrastructureinfrastructure

Accessibility to the decision-making Accessibility to the decision-making processprocess

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Indicators of Political RightsIndicators of Political Rights

Degree to which fair and competitive Degree to which fair and competitive elections occurelections occur

Ability of voters to endow Ability of voters to endow representatives with real powerrepresentatives with real power

Ability to organize political partiesAbility to organize political parties Existence of safeguards on the rights Existence of safeguards on the rights

of minoritiesof minorities

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Political & Legal InfluencesPolitical & Legal Influences

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Indicators of Civil LibertiesIndicators of Civil Liberties

Existence of freedom of the pressExistence of freedom of the press Equality under the law for all Equality under the law for all

individualsindividuals Extent of personal social freedomsExtent of personal social freedoms Degree of freedom from extreme Degree of freedom from extreme

governmental indifference or governmental indifference or corruptioncorruption

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Comparative Measures of FreedomComparative Measures of Freedom

POLITICAL RIGHTS

CIVIL LIBERTIES

Partly FreeNot Free Free

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TotalitarianismTotalitarianismA political system in which a single agent, A political system in which a single agent, whether an individual, group, or party, whether an individual, group, or party, monopolizes all political power.monopolizes all political power.

Aims to subordinate all aspects of the day-to-Aims to subordinate all aspects of the day-to-day life of people to the power of the state.day life of people to the power of the state.

Merging the concepts of the state and the Merging the concepts of the state and the people.people.

Order is often imposed through military power.Order is often imposed through military power.

Neither recognizes nor permits opposition. Neither recognizes nor permits opposition. Tools used include: violence, persecution, Tools used include: violence, persecution, propaganda, censorship.propaganda, censorship.

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AuthoritarianismAuthoritarianism: a political system : a political system that aims to rule completely all affairs that aims to rule completely all affairs of all citizens.of all citizens.

FascismFascism: to control people’s minds and : to control people’s minds and souls through the supremacy of the souls through the supremacy of the state.state.

Secular TotalitarianismSecular Totalitarianism: using the : using the power of the state or the army to power of the state or the army to enforce control of all aspects of the enforce control of all aspects of the business environment. Communism business environment. Communism and total government ownership and and total government ownership and control of the factors of production.control of the factors of production.

Theocratic TotalitarianismTheocratic Totalitarianism: religious : religious leaders are the political leaders,leaders are the political leaders,

Trends in Political SystemsTrends in Political Systems

1. Breakdown of Totalitarian Regimes.

Many totalitarian regimes failed to deliver economic progress to the vast majority of their populations.

2. Improved Communication Technology

Weakened the ability of totalitarian states to control citizens’ access to information.

3. Higher Standards of Living

State of TotalitarianismState of Totalitarianism

Multi-ethnic societies where power is Multi-ethnic societies where power is not held by a dominant ethnic groupnot held by a dominant ethnic group

Neocommunist or post communist Neocommunist or post communist transitional societiestransitional societies

Many are creeping towards market Many are creeping towards market modelmodel• Political changesPolitical changes• Economic changesEconomic changes

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Political Risks for International BusinessPolitical Risks for International Business

Political RiskPolitical Risk: The chance that political The chance that political

decisions, events, or conditions decisions, events, or conditions in a country will affect the in a country will affect the

business environment in ways business environment in ways that lead investors:that lead investors:

- To lose some or all of the value of their investment, or

- Be forced to accept a lower than expected rate of return.

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Sources of Political RiskSources of Political Risk SystemicSystemic: Political risk created by shifts in public : Political risk created by shifts in public

policy, such as a new political leadership that may policy, such as a new political leadership that may adopt a different approach than its predecessor.adopt a different approach than its predecessor.

ProceduralProcedural: Political actions can sometimes create : Political actions can sometimes create frictions that interfere with the procedural frictions that interfere with the procedural transactions between units. (transactions between units. (Government Government corruption, labor disputes, a partisan judicial corruption, labor disputes, a partisan judicial systemsystem))

DistributiveDistributive: Political actions that aim to claim a : Political actions that aim to claim a greater share of rewards.greater share of rewards.

CatastrophicCatastrophic: Random political developments.: Random political developments.

Political SystemPolitical System

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Political Strategies for International Political Strategies for International BusinessesBusinesses

Identify the exact issueIdentify the exact issue• Trade barrier?Trade barrier?• Environmental standards?Environmental standards?• Workers rights, etc?Workers rights, etc?

Define/determine the political aspect of the issueDefine/determine the political aspect of the issue Assess the potential political action of other Assess the potential political action of other

companiescompanies Identify important institutions and individualsIdentify important institutions and individuals Formulate strategiesFormulate strategies

• Key objectivesKey objectives• AlternativesAlternatives• Probable effectivenessProbable effectiveness

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Legal EnvironmentLegal Environment Common law systems (tradition/precedent)Common law systems (tradition/precedent)

• United StatesUnited States• United KingdomUnited Kingdom

Civil law: based on a systematic and extensive codification of Civil law: based on a systematic and extensive codification of laws. Political officials prepare a written collection of laws. Judges laws. Political officials prepare a written collection of laws. Judges apply existing laws instead of creating them. apply existing laws instead of creating them. • GermanyGermany• FranceFrance• JapanJapan

Theocratic law (based on religious principles and rules)Theocratic law (based on religious principles and rules)Islamic Law that is based on the Qur’an, the practices of the prophet, the Islamic Law that is based on the Qur’an, the practices of the prophet, the

writings of scholars, and consensus of the community.writings of scholars, and consensus of the community.• SudanSudan• PakistanPakistan

A Customary Law System: follows the wisdom of daily A Customary Law System: follows the wisdom of daily experience.experience.

A Mixed Legal System.A Mixed Legal System.

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Impact of Laws on International BusinessImpact of Laws on International Business

National laws affect all local business National laws affect all local business activities.activities.

National laws affect cross-border National laws affect cross-border activities.activities.

International treaties and International treaties and conventions may govern some cross-conventions may govern some cross-border transactions.border transactions.

Legal Issues in International BusinessLegal Issues in International Business

Managers look at legal issues from two perspectives::

Operational (Procedural) ConcernsOperational (Procedural) Concerns: How do legal : How do legal regulations impact day-to-day operations? regulations impact day-to-day operations?

starting a business, starting a business, hiring and firing, hiring and firing, entering and enforcing contracts, entering and enforcing contracts, closing down the businessclosing down the business

Legal Issues in International BusinessLegal Issues in International Business

Strategic ConcernsStrategic Concerns: How do legal regulations : How do legal regulations affect companies’ long-term competitiveness?affect companies’ long-term competitiveness?

Product safety and liabilityProduct safety and liability Marketplace behaviourMarketplace behaviour Product originProduct origin Legal jurisdictionLegal jurisdiction ArbitrationArbitration

Intellectual Property Rights (IPRs)Intellectual Property Rights (IPRs)

Now, countries are competing on the strength of Now, countries are competing on the strength of their brainpower to create might, prestige, and their brainpower to create might, prestige, and wealth.wealth.

The output of this brainpower is called intellectual The output of this brainpower is called intellectual property – books, designs,brand names, software.property – books, designs,brand names, software.

Problems occur because IP is hard to conceive but Problems occur because IP is hard to conceive but easy to copy. (Piracy)easy to copy. (Piracy)

IPRs refer to the right to control and derive the IPRs refer to the right to control and derive the benefits from writing (copyrights), inventions benefits from writing (copyrights), inventions (patents), processes (trade secrets),and identifiers (patents), processes (trade secrets),and identifiers (trademarks).(trademarks).

Intellectual Property Rights (IPRs)Intellectual Property Rights (IPRs)

Legal problems arise because countries because Legal problems arise because countries because not all countries formally support the various not all countries formally support the various conventions that protect IPRs.conventions that protect IPRs.

The Paris Convention for the Protection of The Paris Convention for the Protection of Industrial Property Industrial Property

The Berne Convention for the Protection of The Berne Convention for the Protection of Literary and Artisitic Works.Literary and Artisitic Works.

The Trade Related Aspects of Intellectual Property The Trade Related Aspects of Intellectual Property Rights (TRIPS) code of the WTO.Rights (TRIPS) code of the WTO.

Why Some Countries are Less Inclined to Why Some Countries are Less Inclined to Protect IPRsProtect IPRs

1. Level of Economic DevelopmentLevel of Economic Development: Poorer countries : Poorer countries provide weaker legal protection than do richer countries.provide weaker legal protection than do richer countries.

Rich countries: : protecting ideas is the only way to protecting ideas is the only way to energize the incentive to innovate.energize the incentive to innovate.

Poor countries: : Strict protection of IPRs restricts the Strict protection of IPRs restricts the diffusion of new technologies, inflates the prices, inhibits diffusion of new technologies, inflates the prices, inhibits economic development by controlling the use of existing economic development by controlling the use of existing knowledge.knowledge.

2.2. National Cultural AttributesNational Cultural Attributes: :

Individualist v. Collectivist OrientationsIndividualist v. Collectivist Orientations

Legal Issues for International Legal Issues for International BusinessesBusinesses

Worker relationsWorker relations• Health and safety standardsHealth and safety standards• WorkweekWorkweek

Employment practicesEmployment practices Antitrust prohibitionsAntitrust prohibitions Contractual relationshipsContractual relationships Environmental practicesEnvironmental practices Patents, trademarks, and intellectual Patents, trademarks, and intellectual

property protectionproperty protection Taxes and reporting requirementsTaxes and reporting requirements

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Chapter ReviewChapter Review Discuss the different functions political Discuss the different functions political

systems performsystems perform Compare political regimes and how they Compare political regimes and how they

influence managerial decisionsinfluence managerial decisions Describe how management formulates Describe how management formulates

and implements strategies to deal with and implements strategies to deal with differing political environmentsdiffering political environments

Study different types of legal systems and Study different types of legal systems and relationshipsrelationships

Exam major legal issues in international Exam major legal issues in international businessbusiness

3-16