Political and Legal Systems in National Environments
1. The Nature of Country Risk
Country risk Exposure to potential loss or adverse effects on company operations and profitability caused by developments in a country’s political and/or legal environments.
2. Political and Legal Environments in International Business
Political system A set of formal institutions that constitute a government. Legal system A system for interpreting and enforcing laws.
3. Political Systems Totalitarianism
totalitarian states from the past include Nazi Germany (1933 –1945), Spain (1939–1975), China (1949–1980s), and the Soviet Union (1918–1991). Under totalitarianism, the state attempts to regulate most aspects of public and private behavior
Socialism is based on a collectivist ideology in which the collective welfare of people is believed to outweigh the welfare of the individual.
Private property rights Limited government
Democracy’s Link to Economic Freedom and Openness The Relationship between Political Systems and Economic Systems
Command Economy makes the state a dominant force in the production and distribution of goods and services. Market Economy market forces—the interaction of supply and demand—determine prices Mixed Economy exhibits the features of both a market economy and a command economy.
Legal systems provide a framework of rules and norms of conduct that mandate, limit, or permit specified relationships among people and organizations and provide punishments for those who violate these rules and norms. -Rule of law A legal system in which rules are clear, publicly disclosed, fairly enforced, and widely respected by
individuals, organizations, and the government.: Common Law Civil Law Religious Law Mixed Systems
Mixed systems consist of two or more legal systems operating together
5. Participants in Political and Legal Systems Government
The government, or the public sector, is the most important actor, operating at national,
marketing. or causes. coercion.
Boycotts against Firms or Nations
A boycott is a voluntary refusal to engage in commercial dealings with a nation or a company
War. and other forms of violence pose significant problems for business operations. insurrection. For example.
.org). Types of Country Risk Produced by Political Systems Government Takeover of Corporate Assets
Governments seize corporate assets in two major ways: confiscation and expropriation. Types of Country Risk Produced by Legal Systems Country Risk Arising from the Host Country Legal Environment
Foreign Investment Laws These laws affect the type of entry strategy firms choose. For example. and local level
Supranational agencies such as the World Trade Organization (www. Finland.
Embargoes and Sanctions
A sanction is a type of trade penalty imposed on one or more countries by one or more other countries An embargo is an official ban on exports to or imports from a particular country. aim to advance the economic and political interests of their members. France. Marketing and Distribution Laws These laws determine which practices are allowed in advertising. and Violence
War. promotion.org) strongly influence international business. in order to isolate it and punish its government. Expropriation is seizure with compensation. or intimidation
7. such as the European Union (EU).oecd.
6.un.worldbank. the Organisation for Economic Co-operation and Development (OECD. Insurrection. industries. and distribution. www.
Rival domestic firms with a strong presence in the host country naturally have an interest in opposing the entry of foreign firms into the local market and may lobby their government for protection.
Terrorism is the threat or actual use of force or violence to attain a political goal through fear. as well as their operations and performance.state. Regional trade organizations.
Special Interest Groups
Special interest groups serve the interests of particular countries.wto.org). and the Association of Southeast Asian Nations (ASEAN). the North American Free Trade Agreement (NAFTA). Controls on Operating Forms and Practices Governments impose laws and regulations on how firms can conduct production. and the World Bank (www.org) supports the economic developmental and business goals of advanced economies. Confiscation is the seizure of corporate assets without compensation. the United Nations (www. and distribution activities within their borders.
and obligations to the contracting parties. (2) distribution of the firm’s products through foreign distributors.
The Foreign Corrupt Practices Act (FCPA) Passed by the U. Contract Laws International contracts attach rights. and New Zealand prohibit cigarette advertising on television. (3) licensing and franchising—that is. (4) FDI. to combat pollution and the abuse of air. and (5) joint ventures and other types of cross-border collaborations. and water resources. the Foreign Corrupt Practices Act (FCPA) makes it illegal for a firm to offer bribes to foreign parties for the purpose of securing or retaining business Antiboycott Regulations Antiboycott regulations prevent companies from participating in restrictive trade practices or boycotts imposed by foreign countries against other countries. in order to create and operate a foreign subsidiary. duties. government in 1977. especially large sales. marketing tools. especially in collaboration with a foreign entity. earth. Managing Country Risk Proactive Environmental Scanning Strict Adherence to Ethical Standards Alliances with Qualified Local Partners Protection through Legal Contracts
. Internet and E-Commerce Regulations Internet and e-commerce regulations are the new frontier in legal systems Inadequate or Underdeveloped Legal Systems
Country Risk Arising from the Home Country Legal Environment
Extraterritoriality Application of home country laws to persons or conduct outside national borders. a contractual relationship that allows a firm to use another company’s intellectual property. or other assets for a fee. Laws on Income Repatriation MNEs earn profits in various countries and typically seek ways to transfer these funds back to their home country Environmental Laws Governments also enact laws to preserve natural resources. Contracts are used in five main types of business transactions: (1) sale of goods or services.S.Norway. and to ensure health and safety. Accounting and Reporting Laws Accounting practices and standards differ greatly around the world Transparency in Financial Reporting The timing and transparency of financial reporting vary widely around the world
Increasing Employment Governments often impose import barriers to protect employment in designated industries. The Nature of Government Intervention
Protectionism National economic policies designed to restrict free trade and protect domestic industries from foreign competition. Rationale for Government Intervention Defensive Rationale
Protection of the National Economy Proponents argue that firms in advanced economies cannot compete with those in developing countries that employ low-cost labor.
2. Customs Checkpoints at the ports of entry in each country where government officials inspect imported products and levy tariffs.Government Intervention in International Business
1. regulation. Quota A quantitative restriction placed on imports of a specific product over a specified period of time. Nontariff trade barrier A government policy. effectively increasing the cost of acquisition for the customer. or procedure that impedes trade through means other than explicit tariffs. Tariff A tax imposed on imported products. Protection of an Infant Industry National Security National Culture and Identity
National Strategic Priorities Government intervention sometimes aims to encourage the development of industries that bolster the nation’s economy.