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The Political and Legal Environments Facing Business

The Political and Legal Environments Facing Business

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Published by: Snigdha Singh on Sep 30, 2011
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International Business

Chapter Three

The Political and Legal Environments Facing Business

Chapter Objectives
• To discuss the different goals and functions of political • •
systems To profile trends in the emergence and diffusion of political systems To identify the idea of political risk and approaches to managing it To understand how different political and legal systems affect the conduct of business To profile trends in the evolution and diffusion of legal systems To examine the major legal issues facing international business companies To profile the idea of intellectual property and the bases of concern and controversy
3-2



and interest groups. the relationships amongst those institutions.Political System Defined Political system: the complete set of institutions. and the political norms and rules that govern their functions The ultimate test of any political system is its ability to hold a society together. 3-3 . political organizations.

3.1: Political and Legal Influences on International Business 3-4 .Fig.

Ways to Assess Political Systems • Individualistic -people accept the primacy of individual freedoms in the political. and cultural realms -people believe in minimal government intervention • Collectivist -people reason that the needs of society take precedence over the needs of the individual -people believe that it is the government’s role to define the needs and priorities of the country Collectivist paradigms may be either democratic (Japanese) or authoritarian (Chinese) in nature. economic. 3-5 .

theories. 3-6 . • Shared ideologies create bonds within and between countries.Political Ideology Defined Political ideology: the body of constructs. and aims that constitute a sociopolitical program • Pluralism indicates the coexistence of a variety of ideologies within a particular society. differing ideologies split societies apart.

3-7 • Totalitarianism: the monopolization of power by . either directly or through elected representatives a single agent. the government imposes order via military power. religious leaders are also the political leaders. opposition is neither recognized nor tolerated In theocratic totalitarianism.Types of Political Ideologies: The Two Extremes • Democracy: widespread citizen participation in the decision-making and governance processes. in secular totalitarianism.

3.Fig.2: The Political Spectrum 3-8 .

expression.Features of Contemporary Democratic Systems • freedom of opinion. • • • • • • and the press freedom to organize free elections limited terms for elected officials an independent and fair court system a nonpolitical bureaucracy and defense infrastructure citizen access to the decision-making process 3-9 .

Fig.3: Comparative Measures of Freedom 3-10 . 3.

2: Global Trends in Freedom: Political Freedom 2004 3-11 .Map 3.

refers to the arguments that apparently innate and irreconcilable difference amongst cultures can trigger a backlash against Western ideas regarding political rights and civil liberties. Differentialism. i.. Many who champion democracy truly believe that greater political freedom also leads to economic freedom and higher standards of living.Trends in Political Systems • Totalitarian regimes continue to fail as citizens • challenge the right of the state to govern.e. the clash of civilizations. 3-12 .

e. the likelihood.. 3-13 .Political Risk Defined Political risk: the expectation. i. that the political climate in a country will change in such a way that a firm’s operating position or investment value will deteriorate MNEs do their best to effectively deal with the threat of political risk through active and/or passive approaches.

] • Distributive [tax and regulatory revisions] • Catastrophic [random political events] 3-14 . etc.Types of Political Risk [ranging from the least to the most destructive] • Systemic [a change in public policy] • Procedural [bureaucratic delays. labor disputes.

Leading Sources of Political Risk • • • • • • • • 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 Discriminatory taxation policies 3-15 .

and enforcing the laws in a specified jurisdiction Generally. differences in the structure of law influence the attractiveness of a particular country as an investment site.Legal System Defined Legal system: the mechanism for creating. 3-16 . interpreting.

Types of Legal Systems • Common law [based on precedent] • Civil law [based upon a set of laws that comprise a code] • Theocratic law [based upon religious precepts] Customary law anchors itself in the wisdom of daily experience or important traditions. A mixed legal system emerges when two or more legal systems are used within a single country. 3-17 .

3: Legal Systems in the World Today 3-18 .Map 3.

3.Fig.4: The Diffusion of Civil Law: A Selective Profile 3-19 .

Legal Issues in International Business • Operational concerns – ease of entry and exit – hiring and firing employees – contract enforcement • Strategic concerns – – – – product safety and liability marketplace behavior product origin legal jurisdiction [continued] – arbitration 3-20 .

patents. 3-21 . but those with a more collectivist outlook extol the virtues of shared ownership. etc. trademarks. Those countries with a more individualistic orientation view IPRs as intrinsically legitimate. less developed countries provide less protection for IPRs than do industrialized nations.• Intellectual property rights [IPRs]: ownership rights to intangible assets [copyrights.] Generally.

Presently. [continued] 3-22 . there is a shift away from totalitarian governments toward more democratic political ideals and freer market principles.Implications/Conclusions • Many countries are in a state of political transition.

some may diminish the ability of firms to compete with foreign competitors.• International business is affected by laws and regulations enacted both by countries and by international organizations. 3-23 . • Laws may be at cross-purposes.

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