The Political and Legal

Environments
Facing Business

3-1
 Political System
 Political system includes the structures,
processes, and activities by which a nation
governs itself.

 Political systems can be assessed

according to two dimensions
• Degree to which they emphasize collectivism as
opposed to individualism
• Degree to which they are democratic or totalitarian
 Political Participation
 Who participates in them
And
 What extend they participate

Wide participation occurs when

people capable of influencing the
political system make an effort to do
so
Narrow participation occurs when
few people participate
 Political Ideologies

Totalitarianism Pluralism Anarchism

Both private and public

groups need to balance
each other’s power
Every aspect of Only individuals and
people’s lives must be private groups can
controlled to preserve order preserve personal liberties
- No individual liberties
 Political Ideologies

 Most modern societies are pluralistic

politically
• Arise due to differences in
languages, ethnic background,
tribal groups or religions
 The Political Spectrum

Democratic Nondemocratic
Democracy Government Government Totalitarianism
 Indicators of Political Rights
 Degree to which fair and competitive
elections occur
 Ability of voters to endow
representatives with real power
 Ability to organize political parties
 Existence of safeguards on the rights
of minorities

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 Indicators of Civil Liberties
 Existence of freedom of the press
 Equality under the law for all
individuals
 Extent of personal social freedoms
 Degree of freedom from extreme
governmental indifference or
corruption

3-6
Comparative Measures of Freedom

POLITICAL RIGHTS

Not Free Partly Free Free

CIVIL LIBERTIES

3-7
 Democracy
 Freedom of opinion, expression, press and
organization
 Elections
 Limited terms for elected officials
 Independent court system
• High regard for individual rights
• Respect for property
 Nonpolitical bureaucracy and defense
infrastructure
 Accessibility to the decision-making
process
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 Totalitarianism
 Typically theocratic or secular
 Opposite end of the political spectrum
from democracy
 Order is often imposed through military
power
 Single party, group, or individual
monopolizes political power
 Lack of constitutional guarantees
 Neither recognizes nor permits opposition
 Fascism
 Authoritarianism (tribal, right-wing)
 Communism/ socialism 3-9
 States in Transition
 The political of the world has
changed radically since the late
1980’s
 A wave of democratic revolutions swept
the world
The Spread of Democracy
 Political Risks for International Business
 Political Risk—caused by political instability
• Promotes fear that operating position will deteriorate
• Tends to be higher in totalitarian regimes

 Sources of political risks

• Unstable Political System
• Political involvement of religious or military
leader
• Frequent changes in government
• Corrupt or poor leadership
• Civil disorder due to:
 Economic conditions
 Human rights violations
 Conflict among races, religions & etnics
 Group animosity
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 Can cause:
• Procurement difficulties
• Work stoppages
• Shipment delays
• Property damage

 Types of political risk

• Micro—political actions are aimed at specific
foreign investments
• Eg; Pakistan, France
• Macro—political actions affect a broad
spectrum of foreign investors
• Eg; Cuba
Types of Political Risk

Political
Risks
 Conflict and Violence

Arises from: Reduces ability to:

 People’s resentment  Obtain materials
toward government and equipment
 Territorial disputes  Manufacture and
between nations distribute products
 Ethnic, racial or  Protect employees’ lives
religious disputes and firm’s assets
 Terrorism and Kidnapping
 Kidnapping and other terrorist
activities are means of making
political statements.

 Kidnapping and the taking of

hostages may be used to fund a
terrorist group’s activities.
Executives of large international
companies are prime targets.
 Terrorism and Kidnapping
Security checklist for managers on business abroad:
 Fly non-stop when possible and avoid unsecured areas of
airports
 During your stay, vary your routines and means of
transportation
 Keep a low profile and refrain from loud, flashy behavior
 Give friendly but cautious answers to personal questions
 Know local emergency procedures before trouble strikes
 Property Seizure
Confiscation
The forced transfer of assets
from a company
to the government without
compensation

Expropriation Nationalization
The forced transfer of assets When expropriation involves
from a company to the one or a small number of
government with companies in an industry,
compensation the government may take
over an entire industry
 Policies and Laws
Policy changes restrict:

• Foreign ownership

• Investment levels

• Business activities
 Local Content Requirements
 Laws stipulating that a specified
amount of a good or service be
supplied by producers in the
domestic market. These
requirements can force companies to
use locally available raw materials,
procure parts from local suppliers, or
employ a minimum number of local
workers.
 Managing Political Risk
Avoidance

Influencing
Local Risks Adaptation
Politics

Information
Gathering
 Managing Political Risk
Local equity / debt

Localization
Adaptation
Incorporate risk into Development assistance
business strategies

Partnerships

Insurance
 Managing Political Risk

Current employees
with relevant information
Information gathering
Gather data to better
predict and manage risk

Agencies specializing
in political-risk services
 Managing Political Risk

Lobbying
Influencing local lawmakers
Influence local politics
Present firm’s views
on political matters

Corruption
Foreign Corrupt Practices Act
 Legal Systems
 Rules - laws - that regulate
behavior
• Processes through which laws are enforced &
grievances are redressed
 Three main types of legal
systems – in use around the
world:
• Common law
• Civil law
• Theocratic law
Kinds of Legal Systems

Common law—based on tradition, precedent, custom, and usage

• Interpretation by the courts
• US and UK
Civil law—codified legal system
• Based on a detailed set of laws that make up a code
• Rules for business transaction included
• Based on how the law is applied to the facts
• Germany France, Japan
Theocratic law—based on religious precepts
• e.g., Islamic law
– has remained frozen
– moral rather than commercial law
– intended to govern all aspects of life
– Sudan and Pakistan
 Contract Law
 Contract law is the body of law that enforces a
contract
• Specifies conditions under which an exchange is to
occur
• Details rights and obligations of parties
 Dispute resolution is often complex
• Where to arbitrate and whose laws apply?
• Validity of contracts and decisions
 Role of United Nations Convention on Contracts
for the International Sale of Goods (CIGS)
Foreign Corrupt Practices Act
 The act was passed during the 1970s following
revelations that U.S. companies had bribed
government officials in foreign countries in an
attempt to win lucrative contracts
 This law makes it illegal to bribe a foreign
government official in order to obtain or maintain
business
 The act allows facilitating or expediting payments
to secure the performance of a routine
governmental action
Corruption as of 2004

Figure 2.1: Rankings of Corruption by Country

2004

Finland
New Zeland
United Kingdom
United States
France
Malaysia
Italy
Brazil
China
India
Russia
Zimbabw e
Indonesia
Nigeria
Bangladesh

0 2 4 6 8 10
Corruption Index (10=clean; 0=totally corrupt)
 Intellectual Property Rights
 Intellectual property refers to property
that is the product of intellectual activity
 Intellectual property laws are a very
important stimulus to innovation and
creative work
 Protection of intellectual property rights
differs greatly from country to country
Piracy of Intellectual Property

Figure 2.2: Regional Piracy Rates for Software

Eastern Europe

Asia Pacific

Latin America

Middle East and Africa

Western Europe

North America

0 20 40 60 80
Percentage of Software that is Pirated
 Product Safety and Liability
 Product safety laws set safety standards
for products and manufacturing processes
 Product liability laws hold the firm and its
officers responsible for product safety
standards
 Criminal laws/ civil liability laws
• Civil laws call for payment and monetary damages
• Criminal liability laws result in fines or imprisonment
Other Legal Issues for International
Businesses
 Worker relations
• Health and safety standards
• Workweek
 Employment practices
 Antitrust prohibitions
 Environmental practices
 Patents, trademarks, and intellectual
property protection
 Taxes and reporting requirements
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 Political Strategies for International
Businesses
 Identify the exact issue
• Trade barrier?
• Environmental standards?
• Workers rights, etc?
 Define/determine the political aspect of the issue
 Assess the potential political action of other
companies
 Identify important institutions and individuals
 Formulate strategies
• Key objectives
• Alternatives
• Probable effectiveness

3-13
 Attractiveness
Figure 2.1: Country Attractiveness
Costs
Benefits Corruption
Size of Economy Lack of Infrastructure
Likely Economic Growth Legal Costs

Overall
Attractiveness

Risks
Political Risks: Social Unrest/Anti-Business Trends
Economic Risks: Economic Mismanagement
Legal Risks: Failure to Safeguard Property Rights
 Ethical Behavior
Personal behavior in accordance with rules or
standards for right conduct or morality

Enron Ethical absolutism

Import ethics
Tyco from home
Worldcom
Parmalat (Italy) Ethical relativism
When in Rome,
do as the Romans
 Social Responsibility
Go beyond legal obligations to balance commitments to
investors, customers, communities and other companies

 Respect consumers’ rights

 Guard workers’ rights
 Protect the environment
 Preserve employment
 Encourage development
 Improve health
 Support education
 International Relations
Favorable international
political relations foster:
 Stable business
environments
 Improved business
communications
 Efficient distribution
systems
 Prompt and equitable
dispute resolution
 Expanded
opportunities
 Diminished risk levels