Chapter 3:

Politics, Law and Business Ethics

by Ooi Soon Beng

Describe each main type of political system. Identify the origins of political risk and how managers can reduce its effects. Describe each main type of legal system and the important global legal issues. Explain ethics and social responsibility and key issues facing international companies. Explain how international relations affect international business activities.

Macroeconomics

The system of government in a nation wields considerable impacts on businesses.

Macroeconomics

What is a political system ?

A system that includes the structures, processes, and activities by which a nation governs itself.

A nations political system is derived from its history and culture.

Macroeconomics

Participation occurs when people voice opinions, vote, and show general approval or disapproval of the system. Wide participation occurs when people who are capable of influencing the political system make an effort to do so. Narrow participation occurs when few people participate.
Macroeconomics

Totalitarianism

Pluralism

Anarchism

Both private and public groups need to balance each others power. Every aspect of peoples lives must be controlled to preserve order.
Macroeconomics

Only individuals and private groups can preserve personal liberties.

Govern without the support of the people. Tightly control peoples lives. Do not tolerate opposing viewpoints.
Macroeconomics

Totalitarian governments share three features:

Imposed Authority Lack of Constitutional Guarantees Restricted Participation
Macroeconomics

An individual or group forms the political system without the explicit or implicit approval of the people. Denies its citizens the constitutional guarantees of democracies.
Political representation is limited to parties that are sympathetic to the government or to those that pose no credible threat.

Theocratic Totalitarianism Communist Totalitarianism Secular Totalitarianism Tribal

Right-winged
Macroeconomics

Political system under the control of totalitarian religious leaders. Historically, theocratic totalitarianism has badly damaged the economies of those nations implementing it. Example: Ayatollah Khomeini Iran, Afghanistan.

Taliban chief Mullah Omar

Political system in which leaders rely on military and bureaucratic power. Example: Pakistan, and Latin America before early 1980s, S. Korea , Taiwan and the Philippines.
Macroeconomics

Chiang Kai Shek Pervez Musharraf

Ferdinand Marcos

Communist totalitarianism
is when a government has sweeping political and economic powers. Investing in such country is less appealing because governments can act as they wish and can destroy the profitability of a business operation.
Macroeconomics

Kim-Jong-Un

Obtain social and economic equality through government ownership and regulation of the means of production. Example: Russia, Cuba

Vladimir Vladimirovich Putin Fidel Alejandro Castro

Macroeconomics

One ethnic group imposes its will on others with whom it shares a national identity. Such political system discourage investment because they are often characterized by a great deal of civil unrest, ethic conflict, or even war. Example: Zimbabwe, Tanzania, Uganda, Kenya.

Government endorses private ownership of property and a market-based economy but grants few political freedoms. Leaders strive for economic growth but oppose left-wing totalitarianism, or communism. Countries with this type of political system are typically very attractive to international companies as a location for investment Example: Argentina, Brazil, Paraguay, Chile in the 1980s.
Macroeconomics

What are the risks of doing business in totalitarianism nations?

Macroeconomics

Laws are vague or do not exist. Bureaucrats may interpret laws as they wish. Doing business in a totalitarian country is risky.

What is Democracy?

Government leaders are elected directly by the people or their representatives. Views and opinions of the people are incorporated into the national decision-making process. Laws protecting individual property rights are enforced. A greater portion of the countrys factors of production are under private ownership.

Macroeconomics

Five freedoms democracy strive to provide its people:

Freedom of expression Periodic elections Full civil, property rights Minority rights Nonpolitical bureaucracies

Macroeconomics

Democracies represent more stable business environments than do totalitarian systems

Example: India, Taiwan, Hong Kong, South Korea.
Macroeconomics

Maintain stable business environments through laws protecting individual property rights. Participative democracy and free markets encourage economic growth. Means of production belongs in the hands of individuals and private businesses.

In practice, democracies do not guarantee economic growth.

Indonesian economy grew despite a totalitarian regime under President Suharto.

India is the worlds largest democracy; but it experienced slow economic growth for decades.

Asias four tigers Hong Kong, Singapore, South Korea, and Taiwan built strong market economies absent of truly democratic practices.

Macroeconomics

People around the world are demanding greater participation in politics and many nations are abandoning totalitarianism. Globalization is playing a role.

Macroeconomics

Corporate companies face political risks when they conduct business with the outside world.
Macroeconomics

Political risk is the likelihood that a government or society will undergo political changes that negatively affect business activity. It can threaten an exporters market, manufacturing facilities, and the ability to repatriate profits.

Macro risk threatens all companies regardless of industry and affects all companies equally in a country, both domestic and international. Micro risk threatens companies within a particular industry or even smaller groups. Five events can cause political risk:

Macroeconomics

Conflict and violence Terrorism and kidnapping

Political Risks

Property seizure Policy changes Local content requirements

Macroeconomics

Arises from: (1) resentment toward the government; (2) territorial disputes; and (3) ethnic, racial, and religious disputes.
Macroeconomics

Hinders: 1) investment 2) manufacturing and distribution of products 3) procurement of raw materials and equipment, 4) recruitment of talented personnel.

Groups dissatisfied with current political or social situations try to force change through fear and destruction. Each of these increases risks for international companies because expatriate executives are prime targets because their companies can afford large ransoms.

Macroeconomics

Property seizure also increases the risks for international firms and can cause them to avoid investing in nations implementing such tactics.

Confiscation Property Seizure Expropriation Nationalization

Macroeconomics

Confiscation is the forced transfer of assets from a company to the government without compensation. Expropriation is the forced transfer of assets from a company to the government with compensation. Nationalization involves government takeover of an entire industry and is more common than confiscation and expropriation.

Macroeconomics

Nationalization is used to: 1) protect an industry for ideological reasons, 2) save local jobs in an ailing industry, 3) control industry profits, and 4) invest in industries that private companies cannot afford.
Macroeconomics

In 2000, President Mugabe of Zimbabwe confiscated white-owned farms for redistribution, but corruption has resulted in the land went to politicians, military leaders or leaders in the police forces. Between 2000 and 2007, Zimbabwe economy contracted by 40%; inflation vaulted to over 66,000%. On 1 Aug 2008, the Zimbabwe dollar was redenominated by removing 10 zeroes.

Macroeconomics

Robert Mugabe

April 3, 2008,Venezuela President Hugo Chavez nationalized the cement industry. February 28, 2009, Hugo Chavez ordered the army to take over all rice processing and packaging plants. January 20, 2010, Hugo Chavez nationalized six supermarkets of a French company because of increasing price and speculation hoarding illicit.

Macroeconomics

Hugo Chavez

After World War II, socialist governments came to power in several European countries and nationalized heavy industry, especially coal. The purpose is to insure economic development since they blamed the private capital for the 1930a Great Depression. In 1945, the French government seized the car-makers Renault because its owners were alleged to collaborate with the Nazi occupiers of France.
Macroeconomics

The Castro government gradually expropriated all foreign-owned private companies after the Cuban Revolution of 1959. Bonds at 4.5% interest over twenty years were offered to U.S. companies, but the offer was rejected by U.S. In 1938, Mexico nationalized its petroleum industry because the petroleum companies were in rebellion against the government of Mexico.

Macroeconomics

Policy changes can result from newly empowered political parties, pressure from special interests, and civil or social unrest. They can cause managers to regard a nations business environment as one of a field of moving goal posts.

Macroeconomics

Local content requirements are regulations that require international manufacturers to use a certain amount of local resources. Can foster local business activity and create jobs, but can also force companies to invest elsewhere if they are too confining. Foreign firms may have to take on poorly trained local workers, and local raw materials could increase costs or reduce quality.
Macroeconomics

Ten Best Countries Norway Brunei Switzerland Luxembourg Singapore Sweden Taiwan Hong Kong Oman UAE Germany Source: The PRS Group
Macroeconomics

Value 89.0 88.7 88.2 88.0 87.0 83.7 83.5 83.2 83.0 82.7 82.7

Ten Worst Countries Somalia Zimbabwe Sudan Belarus Congo Niger North Korea Guinea Guinea-Bissau Syria

Value 41.2 44.2 48.7 52.7 52.7 53.0 54.0 54.5 54.7 55.0

1) Somalia 2) DR Congo 3) Sudan 4) Myanmar 5) Afghanistan 6) Iraq 7) Zimbabwe 8) North Korea 9) Pakistan 10) Russia 11) Central African Republic
Macroeconomics

Source: Maplecroft

Rank 1 2 3 4 5 6 7 8 9 10

Country Indonesia Greece Malaysia Russia Ireland Argentina Thailand South Korea Portugal Spain

Pre-crisis score 73.2 82.7 84.5 50.7 92.4 53.8 82.1 85.0 83.0 86.6

Sept 2011 score 58.2 40.6 66.6 56.9 60.8 43.7 61.7 73.3 55.9 66.0

Source: Euromoney Country Risk September 2011

Macroeconomics

What are the methods to manage political risks?

Macroeconomics

Companies manage political risks through: 1) Adaptation 2) Information gathering 3) Influence local politics

Incorporate risk into business strategies, with the help of local officials.

Establishing partnerships through joint ventures, strategic alliances, and crossholdings of company stocks. Localizing operations, the product mix, or other elements to suit local tastes and culture. Offering development assistance to the host country in developing distribution and communications networks and improving the quality of life for locals. Obtain insurance to protect against losses and can provide project financing.

Macroeconomics

Gather data to better predict and manage risks

Macroeconomics

Monitoring and even trying to predict political events that could threaten local operations and future earnings. Employ people in the country who have valuable contacts and knowledge. Engage agencies specializing in political-risk services such as political consultants, and riskassessment services.

Deal with local lawmakers and politicians directly or through lobbyists.

Macroeconomics

Lobbying: policy of hiring people to represent a companys views on political matters. Foreign Corrupt Practices Act forbids U.S. companies from bribing government officials or political candidates in other countries (unless a persons life is in danger).

What is a legal system?

Set of laws and regulations, including the process by which laws are enacted and enforced and the ways in which courts hold parties accountable for their actions.

It is influenced by cultural variables, including class barriers, religious beliefs, emphasis on individualism or conformity, and the political system.
Macroeconomics

Totalitarian governments favor public ownership and enact laws limiting entrepreneurial behavior. Democracies encourage entrepreneurial activity and protect small businesses with strong property-rights laws. In India, most business laws originated when the country was struggling for self-sufficiency,. The legal system tended to protect local businesses from international competition.
Macroeconomics

Legal Systems Common Law

Macroeconomics

Civil Law

Theocratic Law

Civil Law Islamic Law

Common Law Civil and Common Law

A common law system is based on tradition and dependent

upon tradition, precedent and usage. Tradition

Nations legal history

Precedent
Past cases before the courts

Usage
How laws are applied
Macroeconomics

Originated in England in the eleventh century and adopted in its territories worldwide. Business contracts tend to be lengthy because they consider many contingencies and possible interpretations in case of dispute. Common law systems are flexible, taking into account particular situations and circumstances. Practiced in Australia, Britain, Canada, Ireland, New Zealand, the United States, and some nations in Asia and Africa.
Macroeconomics

If, however, the court finds that the current dispute is fundamentally distinct from all previous cases, judges have the authority and duty to make law by creating precedent. Thereafter, the new decision becomes precedent, and will bind future courts.

Macroeconomics

A civil law system is based on a detailed set of written rules and statutes that constitute a legal code.
Dates to Roman times in the fifth century B.C. Rules and statutes constitute a legal code Defines all obligations, responsibilities, and privileges

Macroeconomics

Can be traced to Rome in the fifth century B.C. and is the oldest and most common legal tradition. Can be less adversarial than common law because it is not interpreted according to tradition, precedent, and usage. Because laws are codified and concise, parties are concerned with the explicit wording of the code; obligations, responsibilities, and privileges follow the relevant code. Practiced in Cuba, Puerto Rico, Quebec, Central and South America, most of Western Europe, and parts of Asia and Africa.
Macroeconomics

A theocratic law system is based on religious teachings Islamic law Jewish law Hindu law

Macroeconomics

Legal tradition based on religious teachings (e.g., Islamic, Hindu, and Jewish law). Islamic law is the most widely practiced theocratic legal system . It was initially a code governing moral and ethical behavior and was later extended to commercial transactions. Firms operating in countries with theocratic legal systems must be sensitive to local laws, values and beliefs.

Macroeconomics

Intellectual property rights are legal rights to resources that result from intellectual abilities such as graphic designs, novels, computer software, machine-tool designs, and secret formulas and any income these resources generate. Intellectual property can be traded, sold, and licensed in return for fees or royalty payments.
Macroeconomics

Patent Intellectual Property Rights

Trademarks

Copyrights
Macroeconomics

Patent is a right granted to the inventor of a product or process that excludes others from making, using, or selling the invention. The WTO grants patents for 20 years.

Macroeconomics

Lipitor is a cholesterollowering drug used to reduce heart attack and stroke risk, The patent expired on June 28, 2011. The product was launched in 1997, with revenues peaking at $12.6 billion in 2006. By the end of 2009, total revenue was greater than $105 billion. It became the most profitable patent ever produced.
Macroeconomics

Trademarks are words or symbols that distinguish a product and its manufacturer. Trademark protection lasts indefinitely, provided the word or symbol continues to be distinctive (e.g., Xerox).

Macroeconomics

1) Google Valued at: $44.3 billion 2) Microsoft Valued at: $42.8 billion 3) Walmart Value at: $36.2 billion 4) IBM Value at: $36.2 billion 5) Vodafone Value at: $30.7 billion 6) Bank of America Valued at: $30.6 billion 7) GE Value at: $30.5 billion 8) Apple Value at: $29.5 billion 9) Wells Fargo Value at: $28.9 billion 10) AT&T Value at: $28.9 billion Source: Forbes 2011
Macroeconomics

Copyrights give creators of original works the freedom to publish or dispose of them as they choose. Holder can (1) reproduce the copyrighted work, (2) derive new works from it, (3) sell or distribute it, (4) perform it, and (5) display it publicly. Protected under the Berne Convention and the 1954 Universal Copyright Convention.
Macroeconomics

Copyrights can include poems, theses, plays, other

literary works, movies, dances, musical compositions, audio recordings, paintings, drawings, sculptures, photographs, software, radio and television broadcasts, and industrial designs. The copyright to Happy Birthday to You , the most popular song in the English language, belongs to Warner Music Group, and the company regularly charges up to $30,000 to anyone who wants to use the song for profit .
Macroeconomics

Macroeconomics

Former Beatles guitarist George Harrison was sued by Bright Tunes Music in 1976 after the recording company claimed his song "My Sweet Lord" plagiarized "He's So Fine," a song made popular first by The Chiffons.
Macroeconomics

1943-2001

In 2001, a judge declared that Napster could be held liable for vicarious infringement and contributory infringement of copyrights to the music. Napster eventually settled, owing $26 million to music publishers and songwriters. By September 2002, the file sharing site folded.
Macroeconomics

Product liability holds manufacturers, sellers, and others, including individual company officers, responsible for damage, injury, or death caused by defective products. Developed nations have the toughest product liability laws. Less-developed and emerging countries have weaker laws.
Macroeconomics

In 2009, Simplicity, a baby supply company, had to recall over 400,000 drop side cribs after an infant suffocated to death. In 2006, Natural Selection Foods had to recall all of their spinach products after 200 people experienced full blown kidney failure with 5 people actually dying from the E. coli contamination. In 1982, 1986 and 2010, Tylenol recalled Extra Strength Tylenol after the pills were tainted with cyanide, causing 8 people to die.
Macroeconomics

Bridgestone/Firestone had the biggest faulty product recall in automotive history when they recalled 6.5 million tires in 2000.

Macroeconomics

Certain tires were blowing out, causing cars to roll over. The blowouts caused 700 people to be injured and 175 to die.

In 2007, over 4.2 million Aqua Dots were recalled after their toxic toys were found to cause dizziness and vomiting, with more serious cases resulting in comas and seizures.
It was discovered that once the dots got

Macroeconomics

wet they actually produced the same effects as GHB, more commonly known as the date rape drug.

One of the biggest product liability claim to hit the United States is Chinese drywall, a gypsum-based plaster building material imported from China during the height of the housing boom in 2004. The problem with the Chinese drywall is the presence of harmful chemicals which produce sulfurous gases such as carbon disulfide, carbonyl sulfide, and hydrogen sulfide.
Macroeconomics

The emission of these gases, which increases with rising temperature and humidity, causes copper surfaces to turn black and results in sinus problems, nosebleeds and respiratory tract infections for occupants. In 2010, a judge awarded $2.6 million damages to seven Virginia families affected by Chinese drywall-related problems.
Macroeconomics

Antitrust (antimonopoly) laws are designed to prevent companies from fixing prices, sharing markets, and gaining unfair monopoly advantages. Such laws increase competition and thereby keep products fairly priced and ensure a variety of products in any one category. In strict antitrust countries, companies see a disadvantage against competitors whose home countries condone market sharing, whereby competitors agree to serve only designated market segments.
Macroeconomics

The United States and European Union have strict antitrust regulation and are strict enforcers. The most famous antitrust enforcement actions brought by the federal government were the break-up of AT&T's local telephone service monopoly in the early 1980s and its actions against Microsoft in the late 1990s.
Macroeconomics

Ethical Behavior: personal behavior in accordance with guidelines for good conduct or morality. No right or wrong decisions, but alternatives, each of which may be equally valid depending on ones perspective.
Macroeconomics

Corporate Social Responsibility (CSR): practice of companies going beyond legal obligations to actively balance commitments to investors, customers, other companies, and communities.

PHILOSOPHIES
Friedman View Cultural Relativism

Righteous Moralism

Utilitarianism

Macroeconomics

Friedman View: companys sole responsibility is to maximize profits for its owners (or shareholders) while operating within the law.
Macroeconomics

Example: managers would applaud a company moving pollution-generating operations from a strict country to a lax country. But today, many people disagree with this argument and assume a company has CSR obligations .

Cultural Relativist View: company should adopt local ethics wherever it operates because all belief systems are determined within a cultural context.
Macroeconomics

Sees truth, itself, as relative and argues that right and wrong are determined within a specific situation. When in Rome, do as the Romans do captures the essence of cultural relativism.

Righteous Moralist View: company should maintain its home-country ethics wherever it operates because the homecountrys view of ethics and responsibility is superior to others views.
Macroeconomics

Example: company headquarters instructs subsidiary managers to refrain from bribing local officials and, thereby, imposes its righteous moralist view on local managers.

Utilitarian View: company should behave in a way that maximizes good outcomes and minimizes bad outcomes wherever it operates.
Macroeconomics

A utilitarian manager asks the question What outcome should I aim for? and answers, That which produces the best outcome for all affected parties. Example: manager pays a bribe based on calculations that more people will benefit than will be harmed by the outcome.

CSR goes beyond legal obligations to balance commitments to investors, customers, communities, and other companies

Fight to eliminate bribery and corruption Improve labor conditions and guard human rights Practice fair trade to help the disadvantaged Protect the environment and conserve resources

Macroeconomics

Firms operating abroad are affected by laws against bribery and corruption. International businesses may bribe a) to counterbalance poor product quality, b) to create a market for goods, c) to stay competitive with other firms that bribe.
Macroeconomics

Rank Country 1 2 2 4 5 6 7 8 8 10 11 12 New Zealand Denmark Finland Sweden Singapore Norway Netherlands Australia Switzerland Canada Luxembourg Hong Kong

2011 9.5 9.4 9.4 9.3 9.2 9.0 8.9 8.8 8.8 8.7 8.5 8.4

2010 9.3 9.3 9.2 9.2 9.3 8.6 8.8 8.7 8.7 8.9 8.5 8.4

2009 9.4 9.3 8.9 9.2 9.2 8.6 8.9 8.7 9.0 8.7 8.2 8.2

2008 9.3 9.3 9.0 9.3 9.2 7.9 8.9 8.7 9.0 8.7 8.3 8.1

2007 9.4 9.4 9.4 9.3 9.3 8.7 9.0 8.6 9.0 8.7 8.4 8.3

Source: Transparency International

Rank 168 172 172 172 175 175 177 177 177 180 180 182

Country Libya Burundi Equatorial Guinea Venezuela Haiti Iraq Sudan Turkmenistan Uzbekistan Afghanistan Myanmar North Korea

2011 2.0 1.9 1.9 1.9 1.8 1.8 1.6 1.6 1.6 1.5 1.5 1.0

2010 2.2 1.8 1.9 2.0 2.2 1.5 1.6 1.6 1.6 1.4 1.4

2009 2.6 1.9 1.7 1.9 1.4 1.3 1.6 1.8 1.8 1.5 1.3

2008 2.5 2.5 1.9 2.0 1.6 1.5 1.8 2.0 1.7 1.8 1.4

2007 2.7 2.4 2.1 2.3 1.8 1.9 2.0 2.2 2.7 1.9

Source: Transparency International

An American energy, commodities, and services company, Enron Corporation was named "America's Most Innovative Company" by Fortune for six consecutive years, from 1996 to 2001.
Macroeconomics

Enron became bankrupt on December 2, 2001, after many of its recorded assets and profits were discovered to be inflated or even wholly fraudulent and nonexistent. The scandal also caused the dissolution of the Arthur Andersen accounting firm.
Macroeconomics

Managers must monitor behavior of themselves, employees, and business partners.

Macroeconomics

Fair trade products involve companies working with suppliers in more equitable, meaningful, and sustainable ways. Fair Trade USA audits transactions between US companies offering Fair Trade Certified products and their international suppliers in order to guarantee that the farmers and farm workers were paid a fair, honest price.
Macroeconomics

Although coffee remains the most popular Fair Trade product in the United States, Fair Trade USA has also certified tea and herbs, cocoa, rice, vanilla, sugar, flowers, fresh fruit (bananas, mango, pineapple and grapes), wine and apparel.
Macroeconomics

Today, were operating in an eco-aware economy. Green-related trends will have a profound effect on most businesses over the next few years. A green brand can add a unique selling point to a product and can boost corporate image. Companies are printing a number on their products that represent the grams of carbon dioxide emitted from producing and shipping them to retailers.
Macroeconomics

Calls to boycott Girl Scout Cookies because it contains palm oil the production of which is a major cause of deforestation in Southeast Asia, which in turn kills endangered orangutans.
Macroeconomics

The Exxon Valdez oil spill in Alaska on March 24, 1989. Spilling 260,000 to 750,000 barrels of crude oil, it is considered to be one of the most devastating human-caused environmental disasters. The spill cost around US$7 billion including the clean-up costs and punitive fines.

Favorable international political relations foster:

Macroeconomics

Stable business environments Improved business communications Efficient distribution systems Expanded opportunities Diminished risk levels Prompt and equitable dispute resolution