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International Business

Environments & Operations

Chapter 3The Political and Legal

Environments Facing Business

Daniels ● Radebaugh ● Sullivan

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Introduction Every country has its own political and legal

environment as an integral part of its operating system

Companies must determine where, when, and how to adjust their business practices without undermining the basis for success

3 points to consider for IB: The principles and practices of home country

cannot be applied directly to a foreign country Political and legal systems vary among countries Opportunities and threats are handled and impact

differently within different political and legal systems

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IntroductionPolitical and Legal Factors Influencing International Business Operations

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The Political Environment

Managers evaluate, monitor, and forecast political environments

A country’s political system refers to the structural dimensions and power dynamics of its government that specify institutions, organizations, and interest groups, and define the norms that govern political activities Includes complete set of institutions, political

organizations, and interest groups as well as the relationship among institutions and political norms and values

political system A Political system must integrate different groups

into a functioning self-sustaining, self-governing society

It ensures level of stability in social relations and unites a society in the face of diverse viewpoints An essential task of a political system is to integrate the

different elements into a functioning unit It is effective when supported by legitimate

consensus of people who live under it Important for IB:

How officials exercise authority Elect, monitor, and replace officials Respect the rule of law 3-5

Government’s Role in a Society Social equality or social hierarchy Individual liberty or collective security Jurisdiction in some or all areas of society Civil liberties allowed to citizens Remedies of redressing injustice

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Individualism vs. Collectivism

Individualism primacy of the rights and role of the individual

Limited role of political officials and agencies in social transactions

Mainly rule of law; fair regulations; just competition Collectivism

primacy of the rights and role of the community Government intervenes in certain cases involving structure

of industries, conduct of companies, actions of managers– to ensure that business practices benefit society

Officials establish both formal and informal relationships with the business community

Promote social equality, labor rights, workplace democracy Government is connected and interdepedent with businesses

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Political Ideology A political ideology stipulates how society ought

to function and outlines the methods by which it will do so A system of ideas that expresses the goals, theories, and

aims of a socio-political program

Most modern societies are pluralistic Different groups or segments of society hold different,

perhaps competing, political ideologies Two or more groups in a country differ in language, class,

structure, ethnicity, tribal groups, or religion For example:

Democrats vs. Republicans in the United States Democratic Party vs. Liberal Party in Japan

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Spectrum Analysis A way to profile similarities and differences while

figuring out where moderates fall between the two anchors

For example: theocracy vs secularism, democracy vs totalitarianism

A political spectrum outlines the various forms of political ideology The distinguishing feature of political ideologies along the

political spectrum is freedom Political freedom measures

the degree to which fair and competitive elections occur the extent to which individual and group freedoms are

guaranteed the legitimacy ascribed to the general rule of law the freedom expression

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Spectrum AnalysisThe Political Spectrum

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DemocracyDemocracy: A political system that endorses the rule of law and

grants the voting citizenry the power to alter the laws and structure of the government, make decisions, and participate in elections to express their decisions Government of the people, for the people, by the people

In a democracy all citizens are politically and legally equal all are equally entitled to freedom of thought,

opinion, belief, speech, and association all equally command sovereign power over public

officials

Types of democracy Representative

People’s elective representatives hold ultimate sovereignty and enjoy sufficient authority to deal directly and as they see fit with changing circumstances

Parliamentary Citizens elect representatives to a legislative branch of

government called parliament. The executive branch typically consist of a cabinet headed by the prime minister. There is no formal separation of powers between legislative and executive branch

Multiparty Three or more political parties control the government

Social democracy or democratic socialism Use of democratic means to achieve a gradual transition from

capitalism to socialism

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Totalitarianism A single agent (individual, group, party)

monopolizes power |Unquestioning support for official state ideology No activities counter to the goals of the state

A totalitarian system subordinates the individual to the interests of the collective dissent is eliminated through indoctrination,

persecution, surveillance, propaganda, censorship, and violence

Types of totalitarianism

Authoritarianism

Fascism

Secular

Theocratic

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Political Risk Political risk refers to the risk that political

decisions or events in a country negatively affect the profitability or sustainability of an investment

Types: Systemic: Change in political leadership where new

leader may adopt a different approach to management Procedural: risk arises from political actions, such as

public corruption, that interfere with transactions between sellers and buyers and that can raise the costs of getting things done

Distributive: As businesses prosper, the officials seek ways to greater share of rewards

Catastrophic: Random political developments, ethnic discord, civil disorder, or war

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Classifying Political Risk Characteristics of Political Risk

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The Legal Environment The legal system is the mechanism for creating,

interpreting, and enforcing the laws in a specified jurisdiction Specifies the rules that regulate behavior Ensures that a society can pursue economic and social

development and when disagreements arise, resolve them without collapsing to anarchy

Purpose: establish a comprehensive legal network to regulate social activities

Three components Constitutional law sets the framework for the system of

government and defines the authority and procedures of political bodies-- to guarantee open and just political order

Criminal law to safeguard social order Civil and commercial laws to ensure fair and efficient

business transactions

Types of Legal Environments Common law Civil law Theocratic law Customary law Mixed systems

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Legal Systems: Bases of Rule What is the basis of rule in a country?

The rule of man legal rights derive from the individual who

commands the power to impose them associated with a totalitarian system

The rule of law systematic and objective laws applied by

public officials who are held accountable for their administration

associated with a democratic system

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Operational Concerns Operational issues

Starting a business Making and enforcing contracts Hiring and firing local workers Closing down the business

In general rich countries regulate less poor countries regulate more

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Strategic Concerns

Country Characteristics

Product safety and liability

Legal jurisdiction

Intellectual property

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Intellectual Property: Rights and Protection

Intellectual property refers to creative ideas, expertise, or intangible insights that grant its owner a competitive advantage

Intellectual property rights refer to the right to control and derive the benefits from writing, inventions, processes, and identifiers no “global” patent, trademark or copyright

exists

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Intellectual Property: Rights and Protection

Attitudes towards intellectual property Historical legacies

rule of man versus rule of law Economic circumstances

levels of economic development Cultural orientation

individualism versus collectivism