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CHAPTER OVERVIEW
When firms source, produce, and/or market products in foreign countries, they encounter
dynamic and challenging political and legal environments. Chapter Three provides a
conceptual foundation for the examination of the political and legal dimensions of
international business operations. It compares major political regimes, discusses their
potential influence upon the development of effective business strategies, and considers
the relevance of political risk. The chapter also examines the major types of legal
systems that exist today, as well as the strategic and operational concerns they pose. It
concludes with a discussion of intellectual property rights and the associated challenges
confronted in an age of globalization.
CHAPTER OUTLINE
OPENING CASE:
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continue to reform its business environment and to move toward transparent, rules-based,
enforcement-oriented standards. Coming full circle, todays fully-owned Chinese
enterprises are themselves becoming global investors, both by acquiring foreign firms
and investing in greenfield facilities in foreign lands.
TEACHING TIPS: Carefully review the PowerPoint slides for Chapter Three.
Also, review the corresponding video clip, Counterfeiting in China [World
News Tonight, 3:10].
I.
INTRODUCTION
For a multinational enterprise to succeed in countries with different political and
legal environments, its management must carefully analyze the fit between its
corporate policies and the political and legal conditions of each particular nation in
which it operates. Then its must determine how these factors affect the ways in
which the firm can capture opportunities and deflect threats. [See Fig. 3.1.]
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C.
Democracy.
A democracy represents a political system in which citizens participate in the
decision-making and governance process, either directly or through elected
representatives. Contemporary democracies share the following characteristics:
freedom of opinion, expression, and the press; freedom to organize; free
elections; an independent and fair court system; a nonpolitical bureaucracy and
defense infrastructure; and citizen access to the decision-making process. In
decentralized democracies, e.g., Canada and the United States, companies may
face different and sometimes even conflicting laws from one state or province to
another.) The defining characteristic of democracy is freedom. Measures of
political rights and civil liberties have been developed to assess levels of
freedom; a country may be rated as free, partly free, or not free. [See Map 3.2.]
D.
Totalitarianism.
Totalitarianism represents a political system in which citizens seldom, if ever,
participate in the decision-making and governance process; power is
monopolized by a single agent and opposition is neither recognized nor
tolerated. In theocratic totalitarianism, religious leaders are also the political
leaders. In secular totalitarianism, the government imposes order through
military power. Variants of totalitarianism include authoritarianism and
fascism.
E.
Trends in Political Systems.
Several factors have powered the democratization of the world. First, many
totalitarian regimes failed to improve the economic lives of their citizens, who
eventually challenged the right of the state to govern. Second, vastly improved
communications technology weakened the ability of regimes to control peoples
access to information. Third, many people who champion democracy truly
believe that greater political freedom leads to economic freedom and higher
standards of living. Although the world is experiencing general movements
towards democracy and more open economies, this does not necessarily indicate
an increasing homogenization of political systems. In fact, differentialism,
i.e., the clash of civilizations, refers to the argument that apparently innate and
largely irreconcilable differences among cultures can trigger a backlash against
Western ideas regarding political rights and civil liberties.
LOOKING TO THE FUTURE: Will Democracy Survive?
There is a clear link between political and economic freedom and economic growth.
However, democracy does not necessarily mean stability; in fact, in a transition economy
political risk is often quite high. The emergent democracies of the 1990s, especially
those of the former Soviet bloc, still wrestle with domestic unrest and security threats.
Although challenges to democracy are many, terrorism stands out above all others. Some
people argue that if a country is to flourish as a democracy, certain preconditions such as
economic development must be present. However, others argue that democracy is the
result of having political leaders who exhibit both the determination and the skills
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required to assure that democratization occurs. Still others feel that indirect support may
flow from Asias alternative conception of democracy, where economic freedom is
progressing more rapidly than political freedom. If democracy proves resilient and
resourceful, then managers will face the task of adjusting their operations during periods
of economic crisis, but if democracy falters, then managers will face the task of
rethinking their operations in a world of increasing state control and repression.
F.
Political Risk.
Political risk reflects the expectation that the political climate in a country will
change in such a way that a firms operating position or investment value will
deteriorate. Leading sources of political risk are: expropriation or
nationalization, international war or civil strife, unilateral breaches of contract,
destructive governmental actions, harmful actions against people, restrictions on
the repatriation of profits, differing points of view, and discriminatory taxation
policies. [See Table 3.2.] The following types of political risk range from the
least to the most destructive.
1. Systemic Political Risk. Systemic political risk creates risks that affect
all firms because of a change in public policy. However, such changes do
not necessarily reduce potential profits.
2. Procedural Political Risk. Procedural political risk reflects the costs
of getting things done because of such problems as government corruption,
labor disputes, and/or a partisan judicial system.
3. Distributive Political Risk. Distributive political risk reflects
revisions in such items as tax codes, regulatory structure, and monetary
policy imposed by governments in order to capture greater benefits from
the activities of foreign firms.
4. Catastrophic Political Risk. Catastrophic political risk includes
those random political developments that adversely affect the operations of
all firms in a country.
POINTCOUNTERPOINT: Political Risk Management
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Questions
1.
2.
3.
Can the software industry expect to contain and control software piracy without
eventually relying on governments to take a more active role? Why would the
software industry dislike greater government regulation?
If the software industry could successfully develop technical and business measures
to thwart counterfeiters, government intervention would be unnecessary. Thus far,
the industrys best efforts have been unsuccessful. Given the value of the products
involved, the global appeal of pirated software, and the relative ease with which
counterfeiting occurs on a worldwide basis, the temptation for counterfeiters to
continue their activities is irresistible. In spite of the need for assistance and
cooperation from all stakeholders, the software industry could presumably object to
greater government regulation; while innovation moves at lightning speed, regulation
tends to lag well behind technological developments and market realities.
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4.
In your opinion, what rationale do you think consumers in high theft countries (see
Table 3.6) use to justify software piracy? Similarly, what ideas or conditions lead
consumers in lower theft countries to respect IPRs?
Consumers in high theft countries tend to share a collectivist mindset; they see property
as being common to all and existing for the benefit of alloften they do not understand
the basic concept of intellectual property rights. As with many other products, they
want to acquire them at the lowest possible cost. On the other hand, consumers in
lower theft countries tend to share an individualist mindset; the concept of intellectual
property rights is well understood and long established within their countries and
cultures. IPRs are seen to be a necessity for economic development and growth;
royalties and profits are seen as the just fruits of creativity and investment.
5.
What sorts of political or legal solutions should the software industry lobby
governments to apply to the piracy problem?
First, the software industry needs to convince governments the world over of the
need for consistent, tough legislation to protect intellectual property rights.
Governments must also be willing to pursue and prosecute violators. To be
successful in these efforts, it may be necessary for software producers in North
America, Europe, and Japan to convince their governments to pressure the
governments in high theft countries to adopt and enforce appropriate legislation.
Second, the software industry should continue to lobby transnational institutions
such as the World Intellectual Property Association and the World Trade
Organization to help establish standards and police piracy.
WEB CONNECTION
Teaching Tip: Visit www.prenhall.com/daniels for additional information and links
relating to the topics presented in Chapter Three. Be sure to refer your students to the
online study guide, as well as the Internet exercises for Chapter Three.
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CHAPTER TERMINOLOGY:
political system, p.91
individualism, p.92
collectivism, p.92
political ideology, p.93
pluralism, p.93
democracy, p.93
totalitarianism, p.95
authoritarianism, p.95
fascism, p.95
secular totalitarianism, p.95
theocratic totalitarianism, p.96
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