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The Political and Legal Environment Facing Business

The Political and Legal Environment Facing Business

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Published by AnuranjanSinha
The Political and Legal Environment Facing Business
The Political and Legal Environment Facing Business

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Published by: AnuranjanSinha on Oct 02, 2009
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© Copy Right: Rai University
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INTERNATIONALBUSINESS MANAGEMENT
Half the world knows not how the other half lives.-English Proverb
Objective
To discuss the different functions that political systemsperform
To compare democratic and totalitarian political regimes andto discuss how they can influence managerial decisions
To describe how management can formulate and implementstrategies to deal with foreign political environments
To study the different types of legal systems and thelegalrelationships that exist between countries
To examine the major legal issues in international business
Case study
The Hong Kong Dilemma
Swire Pacific Ltd., one of the major hangs, or family-controlledtrading houses prominent in Hong Kong business circles, mustlearn to operate successfully in Hong Kong now that the cityhas reverted from British to Chinese rule. In addition, Swiremanagement must cope with the unstable economic environ-ment initiated by the Asian financial crisis of 1997 andsignificantly worsened by the world economic downturnbeginning in 2001.Swire Pacific Ltd. is a publicly quoted company (a companywhose shares are listed on a stock exchange) with diversifiedinterests under the control of five operating divisions: property,aviation, bev-erages, marine services, and trading and industrial.Swire’s profits in 2001 were marginally higher than in 2000, butits aviation and property divisions suffered due to the globaleconomic downturn, which was complicated by the terroristevents of September 11, 2001 and by the resulting drop-off inairline traffic. The major contributor to Swire’s overall profits,Cathay Pacific Airways of the aviation division, experi-enced a 90percent decrease in profits over the course of the year.How could Hong Kong’s new political status be a problem forSwire? Until the mid-seventeenth cen-tury, China sought tominimize its contact with foreigners by restricting foreign tradeto the port at Macao, which is 75 millions south of Canton,now known as Guangzhou. These restrictions resulted from along his-tory of mutual distrust and misunderstandingbetween the Chinese and foreigners. In the late eighteenthcentury, the Chinese opened more of their ports, but by themiddle of the nineteenth century, they again sought to restrictforeign trade, this time to Canton.Despite the history of restrictions, trade between China and theWest had been flourishing, especially with Britain. The Britishwanted Chinese tea; the Chinese wanted the opium that Britishtraders shipped in from India. Although opium was illegal inChina, its use was widespread, so the Chinese governmentsought to halt its importation. Not surprisingly, the Britishprotested. The results were three Opium Wars between the twocountries within a period of 21 years (1839-1860). In all three,China emerged the loser. The first Opium War gave the Britishpermanent ownership of the island of Hong Kong and itsharbor. From the Third Opium War, they gained Kowloon.The New Territories, which comprise 90 percent of the land areaof Hong Kong, came under British control in 1898 under theterms of a 99-year lease that expired on June 30,1997. Until theearly 1980s, the issue of the 99-year lease’s expiration wasdormant. However, real estate in Hong Kong tends to be leasedon a 15-year basis. So in 1982, nervousness on the part of theHong Kong business community led the British governmentto initiate talks with the Chinese government about whatwould become of Hong Kong in 1997.After prolonged negotiations, the British and Chinese signedthe Sino-British Joint Declaration in 1984. Under the terms of the agreement, China assumed control over Hong Kong onJuly 1, 1997; at that time, Hong Kong became a SpecialAdministrative Region of China, which allows Hong Kong tooperate under a different legal, political, and economic systemfrom the rest of China. The agreement called for “one country,two systems,” meaning that Hong Kong and China-together,“one country”-will have two government systems. China willcontinue its current economic structure, which means heavygovernmen-tal control. Hong Kong will retain its separatepolitical and economic status for 50 years (until 2047) andcontinue to enjoy the free-wheeling, free-market economy thathas flourished there. The Joint Declaration along with the BasicLaw, the post-1997 Hong Kong constitution that Chinadeveloped, provides a sense of direction for economic andpolitical change.Democracy has never been a major part of the political land-scape in Hong Kong. Only once in the first 140 years of Britishrule did Hong Kong consider representative rule, and that wasquashed by the local business elite. Until Hong Kong revertedback to China, it was considered a British colony, presided overby a governor appointed by the queen of England. Once theJoint Declaration of 1984 established a date for the turnover of Hong Kong to China, the British began to push for democracy.In 1990, political parties began to form, and in 1991 for the firsttime, the parties won the right to be represented in HongKong’s Legislative Council (Legco). The people of Hong Kongdirectly elect only a small percentage of Legco’s members, andChina appoints the rest. The Basic Law provides that 50 percentof the legislature may be directly elected by the people by 2004and that full democratization should be discussed in 2007.In 1996, a 400-person committee appointed by the Chinesegovernment voted for Hong Kong ship-ping magnate C. H.Tung as the first chief executive to run Hong Kong beginningJuly 1, 1997. Under direction from China, Mr. Tung has been
LESSON 15THE POLITICAL AND LEGAL ENVIRONMENT FACING BUSINESS
 
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INTERNATIONALBUSINESS MANAGEMENT
slow to make sweeping changes in Hong Kong that will align itmore closely with China. Rather, they have made small gradualchanges that ensure a stable transition. Freedom of speech anddemonstration still exist, and businesses have a free hand torun as they always have. On the political front, although Chinahas encouraged a new era of democracy in Hong Kong, no onedared run against China’s favorite Mr. Tung in the 2002elections, ensuring him another five-year term beginning in July2002. Many believe that Mr. Tung is unable to help HongKong’s deteriorating economy because his interests lie withpleasing Beijing instead of acting in Hong Kong’s best interest.Hong Kong has been hit with a recession and record unem-ployment because of the collapse of the local property marketthe fall of the dollar, and competition from China’s emergingcargo ports. On July 1,2002, the largest mea-sure of change inpolitical structure was enacted when policy makers established aministerial system of political appointees to replace the civilservants. Some fear this development nicks away at the freedomin place by putting more power in the chief executive positionand in the appointees that Beijing will choose.Companies are taking different approaches to deal with thetransition in Hong Kong. Swire has chosen to establish a closeworking relationship with China by entering into partnershipsand selling division stakes to Chinese firms. One of its rivalhongs; Jardine Matheson group, has resisted attempts atChinese ownership and even moved its legal headquarters toBermuda to reduce its exposure to Hong Kong’s uncertainty,sig-’1ificantly reducing its influence in China and its ability togrow as China’s economy expands.Swire is cooperating directly with China in a significant way.Swire even removed the Union Jack from its Cathay Pacificaircraft and repainted the aircraft an oriental jade color. The Swirefamily and its British -based parent company, John Swire &Sons, have some 90 percent of their assets in China and areinvolved in many Chinese joint ventures. Western investorswho want to do business in China constantly approach Swire.However, Swire management is clearly concerned about Swire’sfuture in Hong Kong and China. China could seize its busi-nesses, just as it did in Shanghai many years ago. Moreimportant, however, Chinese partners could become moreinfluential and sophisticated and might rely less on Swire’spartner-ship. Will Swire management be able to negotiate thepolitical environment that is arising in Hong Kong? Will thetrend toward democracy reduce Swire’s influence and control, orwill Swire’s top management and the other business leaders inHong Kong still have significant influence? Is Swire manage-ment correct in pegging its future to the future of China, acountry that is stable politically but searching for the best accom-’T1odation between a market economy and a totalitarianpolitical regime? And as China continues to posi-tion Shanghaias a major business center in China, will that lessen HongKong’s importance?
Introduction
Multinational enterprises (MNEs) like Swire must operate incountries with different politi-cal and legal conditions. For thecompany to succeed, its management must carefully analyzewhether its corporate policies will fit a desirable political andlegal environment. Can it oper-ate successfully in China doingthe same things it does in Hong Kong, or must it adapt itsoperating strategies to fit the political and economic climate inChina? This chapter discusses the political and legal systems thatmanagers encounter and the factors they need to consider whenoperating in different countries.
The Political Environment
Figure 5.1 shows how political and legal factors are part of theexternal environment that influences managerial decisions. Apolitical system integrates the parts of a society into a viable,functioning unit. A major challenge of the political system is tobring together people of different ethnic or other backgroundsand to allow them to work together to govern them-selves. Acountry’s political system influences how business is conducteddomestically and internationally. In Hong Kong, for example,the political change that resulted when China took control in1997 worried many managers because they believed that Chinawould change the relationship between government andbusiness, with the government exerting more influence andcontrol in the business environment.Figure 5.2 illustrates the development of political policies andtheir implementation. Political policies are established byaggregating, or bringing together, different points of view thatare articulated by key constituencies, such as politicians, indi-viduals, businesses, or other special-interest groups. In the caseof Hong Kong, business has always been the key con-stituencyregarding decisions about what government policies are to beestablished. However, that is beginning to change; other interestgroups are emerging to balance off the needs of business.Given the interests of different constituencies, governmentsidentify policy alterna-tives and then choose a specific policy thatit will pursue. The policy is then implemented,Political change or validation may come in many forms. Thephoto shows throngs of people waiting to vote in Zimba-bwean elections. Note that males and females wait in separatelines.and it may be altered depending on the reactions of politicalparties, government bureaucra-cies, legislatures, courts, andother constituencies. Normally, the chief executive officer (CEO)of an MNE watches policies as they develop and makes surethat the company voices its concerns in the interest articulationstage. Then the CEO may want to work closely with a country’skey decision makers in the policy formulation stage, which
 
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INTERNATIONALBUSINESS MANAGEMENT
entails lobbying activ-ities. Finally, the CEO may voice thecompany’s stance on policies once they have been implemented.The key is to make sure that the company doesn’t look as if it’strying to influ-ence laws inappropriately. Sometimes a CEO willtry to influence the home-country govern-ment on policies thataffect countries in which the firm is operating. Prior to 2000,when the United States granted permanent normal traderelations to China, that decision had to be made annually. TheUnited States-China Business Council, an organization of over250 companies doing business in China, lobbies on behalf of its members for stable and expanded U.S.-China economiclinks.3 The council includes companies such as Philip Morris,AT&T, Federal Express, BellSouth, and Lockheed MartinCompany.
FIGURE 5.1 Political and Legal Influences on Interna-tional Business
Figure 5.2 The Political System And Its FunctionsGovernments formulate policy alternatives based on the inputsof different foreign and domestic entities and then implementthe policies. T place then tests the outputs of these policies andrevises them as necessary.Source: From Comparative Politics Today: A World View, 3rded., by Gabriel A. Almond and G. Bingham Powell, Jr.Copyright © 1984 Gabriel A. Almond and G. Bingham PcReprinted by permission Addison-Wesley Educational Publish-ers.
Basic Political Ideologies
A political ideology is the body of constructs (complex ideas),theories, and aims that consti-tute a sociopolitical program. Theliberal ideology of the Democratic Party and the conservativeideology of the Republican Party in the United States areexamples of political ideologies. Most modern societies arepluralistic politically, meaning that different ideologies coexistwithin them because there is no one ideology that everyoneaccepts. Pluralism arises because groups within countries oftendiffer significantly from each other in language (e.g., India),ethnic back-ground (e.g., South Africa), tribal groups (e.g.,Afghanistan), or religion (e.g., the former Yugoslavia). Theseand other cultural dimensions strongly influence the politicalsystem. Managers from the United States, where there are onlytwo key political parties, might find it difficult to understandthe political environment in a country where there are manydifferent ideologies even within the political parties themselves.This makes it difficult for the manager to determine how toarticulate the firm’s interests and how to influence policymaking,The ultimate test of any political system is its ability to hold asociety together despite pressures from different ideologies thattend to split it apart. The more different and strongly held theideas are, the more difficult it is for a government to formulatepolicies that every-one can accept. Differing ideologies incountries such as Yugoslavia and the Soviet Union already brokethose countries apart during the 1990s. The resulting politicalinstability has made it difficult for them to attract foreigninvestment and for managers to feel comfortable operating inand committing resources to them.However, ideologies also help to bring countries together. Onereason China wants Hong Kong back is because of ethnicChinese ties. The belief is that a common Chinese heritage willenable Hong Kong and China to merge together faster thancountries with very different eth-nic ties. In fact, the U.S.government calls mainland China, Taiwan, Hong Kong, andSingapore the Chinese Economic Area. Foreign companies thathave had experience in Taiwan, Hong Kong, and Singapore canuse that experience-and local management-to help them operatesuccessfully in mainland China. Nike, for example, usesTaiwanese shoe manufacturers to invest in China and tomanufacture shoes using Chinese labor. Because of the strongethnic Chinese ties between Taiwan and China, politicaldisagreements notwithstanding, it is easier for Nike to use itsTaiwanese partners than to manufacture shoes on its own.
The Impact of Ideological Differences on NationalBoundaries
Differences in history, culture, language, religion, and politicalideology have greatly affected national boundaries. In Europe,for example, the Austro-Hungarian Empire broke up intoAustria, Czechoslovakia, Hungary, Romania, and Yugoslaviaafter World War I. With the advent of communist rule afterWorld War II, countries often were formed from differentethnic groups held together by totalitarian rule. Yugoslavia, forexample, comprised peoples that were ethnically and religiouslyvery different from each other (Roman Catholic Croats, Greek Orthodox Serbs, Muslim Bosnians, and ethnic Albanians wholived in the southern Yugoslav province of Kosovo). Thecountry’s Croats and Serbs were on opposite sides duringWorld War II, and Croats were accused of murdering thou-sands of Serbs. The Muslims in Bosnia and Kosovo wereholdovers from the Ottoman Empire. The breakup of thecommu-nist bloc in 1989 resulted in the disintegration of countries such as Czechoslovakia, the Soviet Union, and

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