Chapter 2: Political, Economic and Legal environment

University of London

Business and Management

in a Global Context

Chapter 2
Political, Economic and
Legal Environment
- Reading Material

Lecturer: M.Nageb

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Chapter 2: Political, Economic and Legal environment

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Chapter 2: Political, Economic and Legal environment

CHAPTER 2: POLITICAL, ECONOMIC AND LEGAL ENVIRONMENTS

Learning By the end of this chapter, and having completed the

Outcome Essential reading and activities, you should be able to:

• define the concept of institutions and delineate their

key role in reducing uncertainty

• assess the basic differences among political systems

and their influence on international business

• discuss the systemic differences among economies and

the related challenges for international business

• describe the basic differences between legal systems

in the world

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Chapter 2: Political, Economic and Legal environment

Study Guide

Define the concept of institutions and delineate their key role

in reducing uncertainty

2.1 What are Formal Institutions?

2.1 1. What must be remembered is that managers must

Introduction have a thorough understanding prior to doing
business in a foreign country. In other words
managers must understand the political, economic and
legal environments which collectively can be called the
“ rules of the game” for operating in a country.
These are known as “Institutions-Based
Perspective”
If managers are aware of these rules then they will be
able to minimise (functions of institutions ):

• Uncertainty Institutions provide the necessary

guidelines for international firms to
do business. In advanced countries
laws have been established to
ensure that businesses operate in
the right manner. This may not be
so in developing countries where
relationship matters most in doing
business.

• Coase highlighted the importance of

transaction Transaction which is cost incurred in
cost carrying out an activity. For e.g. if a
third party is engaged in China then a
firm would have to engage monitoring,
enforcing and negotiation costs.
Without any institution these cost
would be very high as a third party
may operate to own benefit. Hence
institutions tend to reduce transaction
cost in doing business especially
across borders.

• constrain Here opportunism refers to someone

opportunism. operating with guile ( for their own
benefit ). This is especially so if
institutions are weak and people may

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Chapter 2: Political, Economic and Legal environment

be able to get away with their

opportunistic behaviour. Hence it is
imperative to have institutions so the
people operate ethically without
opportunism

2.2 An 1. Peng and Meyer

institution – – Formal institutions consists of laws, regulations and
based view rules.
of - Informal institutions consist of norms, cultures and
internationa ethics
l business
1.1 What is the purpose of Institutions?
They reduce uncertainty by limiting the range of
acceptable actions. Uncertainty increases transaction
costs (Williamson). Transaction costs represent
monitoring, enforcing and negotiating costs. High
transaction cost may dissuade firms to do business in a
country.
Institutions tend to evolve over time. For example,
the former USSR has been disintegrated and transformed
into market competition – these are known as
transitional economies which require institutional
transition – these are known as fundamental and
comprehensive changes to the formal and informal rules.

See diagram below:

Two core propositions as indicated by Peng and Myer.

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Chapter 2: Political, Economic and Legal environment

Study Guide

Assess the basic differences among political systems and their

influence on international business.

2.3 Political Systems – How country is governed? Use two

dimensions

2.3 Political 1• How a country is governed politically and

Systems represents the rules of the game.
We can explain by using the following two dimensions:
a Collectivism Individualism

b Totalitarian Democratic

a Collectivism
• Collectivist goals are more
important than individual
freedom. Associated with
socialism and state
ownership of production
a Individualism
• individualism – individual
freedom and self
expression; people pursue
their self interest
• freedom over economic
and political pursuits

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Chapter 2: Political, Economic and Legal environment

b Totalitarian – The b. • Democracy -

world has four major forms people directly involved in
of totalitarianism making decision – “
Representative Democracy
Communism Collectivism “
is achieved
through • Characteristics include
dictatorship - freedom of expression
– North - free media
Korea - regular elections
Theocratic Political - fair court system
power is - free access to state
influenced information
by religious
principles – • Political systems –
Saudi governed by Institutions
Arabia or
Iran • Rules laid down by
constitutions
Tribal Political
Party that • There are variations in
represents the representation
the methods
interest of
a • Why are political
particular systems important for
tribe that IB (Int. Business)
monopolises
power – - rules affect IB
Zimbabwe - business can influence
and the legislative process –
Tanzania. e.g. by lobbying
- frequent changes in the
Right • Individual rules is a cause of
Wing permits concern for IB.
individual
economic
freedom
but
prevents
political
freedom to
prevent
rise of
communism

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Chapter 2: Political, Economic and Legal environment

2.3a Why are political systems important for International

business

1.Political system affects international businesses. For e.g. Rupert

Murdoch of Star TV stated that freedom to watch is a threat to
totalitarian regime everywhere - this angered the Chinese authorities
which led to the ban of Star TV in China

2. Businesses can lobby governments to pass laws to protect their own

interests. Farmers lobbied their own governments to provide subsidies to
them to overcome the threats of cheaper imports; the US car companies
lobbied the US government to pass the local content requirement for cars
against cheaper Japanese imports

3. Changes in governments can cause changes in government policies – the

Trump victory was based on the notion that “ America comes first” –
businesses in US are restrained to transfer FDI to cheaper labour
economies for e.g. the US car industry are restrained in increasing their
investment in Mexico or other countries as American jobs will be loss.

4. Businesses have to follow government political systems in countries in

which they operate, for e.g. In an individualistic – capitalist country
businesses would produce what is required by the market, whereas in a
collectivist – totalitarian systems like Iran businesses much support the
governments religious ethos if they intend to operate in Iran. If
businesses are unable to do so then they would have to withdraw from
that country like Google and Facebook withdrew from China as the Chinese
government are known to restrain freedom to communicate.

Article

A 1 Is state capitalism winning? ( In the age-old contest of economic

– growth models, state capitalism has seemed to be gaining the upper
hand in recent years. Avatars of liberal capitalism like the US and the UK
continued to perform anemically in 2012, while many Asian countries,
relying on various versions of dirigisme, have not only grown rapidly and
steadily over the last several decades but have also weathered recent
economic storms with surprising grace.

A 2 The case against free-market capitalism (In 2017 few of the

world’s fastest-growing economies (Ethiopia, Uzbekistan, Nepal, India,
Tanzania, Djibouti, Laos, Cambodia, Mynamar and the Philippines) have free
markets. And many free-market economies are suffering from growth
slowdowns and rapidly rising inequality)

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Chapter 2: Political, Economic and Legal environment

A 3 Can Confucianism save the world? (Democracy and Confucian

values can work together to make good governance)

A 4 In defence of free market capitalism (It has its flaws but it

imparts dynamism to economy that gives rise to innovation)

Video

1 and 2 PESTEL Analysis

Study Guide

Assess the basic differences among economies systems and the

related challenges for international business

2.4 Economic 1 • Broadly there are three types of economic

Systems – systems
refers to Market In a pure market economy, the goods
rules how Economy and services that a country produces,
the country and the quantity in which they are
is governed produced, is not planned by anyone.
economically. Rather price and quantity are
determined by supply and demand. For
a market economy to work, there must
be no restrictions on either supply or
demand

Command In a pure command economy, the

economy government plans what goods and
services a country produces, the
quantity in which they are produced,
and the price at which they are sold.
Resources are allocated “for the good
of society.” The government owns
most, if not all, businesses, including
even small businesses like the bread
bakery and the local farm e.g. N.Korea

Mixed A mixed economy includes some elements

Economy of each. In Canada, for example, while
most business is privately owned and
operated under market principles,
health care, electrical power, and liquor
distribution are run by state owned
enterprises in most provinces, e.g. in

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France.

Coordinated Here the economy operates through

market market signals and such signals
may bring some government
intervention.
E.g. In Germany, employees are in
involved at the Board level to ensure
good corporate governance unlike in the
UK, and government support vocational
training. In Asia the government
provides economic direction e.g.
Singapore.

Liberal In this case the economy operates

Market through market signals. The price
mechanism has a lot to do on what,
how, when, where, why and by who,
goods and services are produced for e.g.
in UK, USA, Canada and Australia (
Anglo countries )

Article

A 5 The Singapore Economy: Then and Now (In 1965 the GDP per
capita was $1580 and in 2014 $71,318; Unemployment in 1965 was 10% and
in 2015 2%)

A 6 Taking the next step, again ( In 2016 five key themes – new
growth areas – Corporate innovation, jobs, urban infrastructure and
connectivity)

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Study Guide

Discuss the systemic differences between legal systems in the

world

2.5 Legal
Systems 1. What are • formal rules that regulate
the behaviour
characteristics • process by which the laws of the
of a legal country are enforced
systems? • court system through which people
can seek justice for their grievances

2. What is the • sets down the rights and obligations

importance of in business
legal systems? • how business transactions are done
• how the law regulates business
practices.

Article

A 7 BNP to pay $11b for US

sanction violation (BNP pleaded
guilty to pay almost US$9 billion
(S$11b) to resolve accusations that it
had vi=olated US sanctions against
Sudan, Cuba and Iran)

A 8 Bribes for overseas deals: 2

local firms charged since 1997
(Over the past 20 years two local
companies and 15 Singaporeans have
been prosecuted in Sigapore for giving
bribes totalling $10.8 million to secure
business deals overseas, the Corrupt
Practices Investigation Bureau (CPIB)
told the Strait Times)

3. Collectivist, • Restrict private enterprise

Totalitarian

4. • Support private enterprise and

Individualistic consumer rights
market

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Chapter 2: Political, Economic and Legal environment

Three
Broad
types of
legal
systems

Common Law • Relates to tradition, precedent and

customs
• Judges look at previous cases to decide
on present cases
• Then base on new precedents laws can
be amended.
• Based on statutes, customs and court
decisions

Civil Law • Detailed laws organised into codes /

codified into books of law
• Judges lead the proceedings, questioning
and deciding. Judges apply the law and
not interpret the law

Religious • Based on religious teachings

Law • Islamic law – most Muslim states
• But this law has to be adjusted to
modern times – so Islamic law should be
combined with common law and civil law.

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Article

A 9 Religions laws in Brunei (In

Brunei, fines, imprisonment or both for
eating, drinking or smoking during fasting
hours, skipping Friday prayers for men or
giving birth out of wedlock, all punishable
by Fines)

Issues for
Internationa Property Property rights refer to the bundle of
l Businesses
Rights legal rights over the use to which a
resource is put and over the use made of
any income that may be derived from
that source. Property rights can be
violated by either private action
(theft, piracy, blackmail, Mafia) or
public action (governmental bribery
and corruption, nationalization).
Lack of confidence in a country’s fair
treatment of property rights
significantly increases the costs and risks
of doing business.

Intellectual • rights over ownership of intellectual

Property property – e.g. software, chemical
Issues formula, movie or music. The intellectual
property can be protected in 3 ways:

i. Patent – gives the inventor exclusive

rights
ii Copyright – authors, composers,
artists, publishers
iii Trademark – allows manufacturers
to differentiate themselves from other.

Example

Apple is seeking damages of $2bn,

claiming infringement of five patents by
Samsung devices sold in the US between
2010 and 2012, including Galaxy
smartphones and tablets. Samsung is

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claiming infringement of two of its

patents by the iPhone and iPad.

• 200 countries have signed the

Paris convention for Protection of
Industrial Property to protect
intellectual property rights and are part
of World Property Organisation

• Intellectual property rights

(patents, copyrights, and trademarks) are
important for businesses if they are to
capitalize on what they have developed.
Firms like Microsoft, Levis, Coca-Cola, or
McDonald’s would have little reason to
invest overseas if other firms in other
countries were able to use the same
name and copy their products without
permission.

Product When product standards are lowered in

safety and other countries, firms face an important
product ethical dilemma. Should they produce
liability products only of the highest standards
even if this puts them at a competitive
disadvantage relative to other producers
and results in not maximizing value to
shareholders? Or should they produce
products that respond to local
differences, even if that means that
consumers may not be assured of the
same levels of safety in different
countries? One serious example Willcocks
use involves the flame retardant
nature of children’s pajamas. In
many countries restrictions on the level
of flame retardency are very low and
even nonexistent, and it is perfectly
legal to manufacture that product
without protective standards. Should
international firms continue to
manufacture to higher protection levels,
with resulting increased costs that may

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put them at a competitive disadvantage?

Article

A 11 Anton Yelchin’s parents sue

Fiat Chrysler (The Parents of Yelchin,
Star Trek Beyond Actor, sued Fiat
Chrysler Automobiles for negligence and
product liability over the rollaway crash
of a Jeep Grand Cherokee that killed
their son)

Corporate • This relates to how shareholders and

governance other stakeholders are able to control
corporate decision makers.
In Germany there is the two-tier board
– the supervisory board that supervises
the decisions of the executive directors;
while in Singapore big organisations
appoint Independent directors or
nominated executive directors to
supervise the decisions of the normal
directors. There is a variation on how
corporate governance is ensured across
countries.

2.6 Country 1. Note that Political, Economic and Legal factors

development: can have a significant impact on the economic
political, development of a country as well as it attractiveness to
economic lure FDI.
and legal
issues 2 The measurement of economic growth:
a. Usually the measurement is GDP per capita but some
say that this is misleading as it does not take into
considerations the cost of living

3 The proper measurement is PPP- adjusted GDP

and if we consider idealed

it is only 6% of the average US consumer would consume.

Still the middle class in India is huge and hence it will be
silly to the discount the Indian market based on the
statistics mentioned.

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4 Other ways to measure economic development?

Sen ( 1999) provides such a measure – considers the
capabilities and opportunities of people when measuring
economic development. So the measurements would
include:
- removing restriction to freedom e.g. tyranny, poverty,
neglect of public facilities and democracy
- basic health care and education is a must for economic
growth

Note: UN has incorporated Sen’s idea in its Human

Development Index ( HDI ) – this is based on life
expectancy at birth, education, average income

5 Another Question that need to be asked is

Why some countries succeed while others fail?

The answer lies hereunder:

• investment and technological progress – higher
productivity and economic success
• innovation and entrepreneurship are the long term
drivers to economic growth and must be support by
market economy and good strong laws to protect property
rights
• higher education is key to prosperity
• sound macroeconomic policy of government – low
inflation, stable exchange rate, low trade barriers and
low budget deficits

• Peng and Meyer ( 2011 ) and North ( 2005 ) see

that political, economic and legal institutions are the
basic determinants of the economic progress of the
country as it affects the cost of doing business in the
country;
- Institutions ensure that firms are able to make
gains from trade
- Lack of strong formal market-supporting
institutions force firms to trade on a much
more informal basis, incurring political, legal
and economic risks in conditions of instability, and
over-dependent on informal relationships
- Emerging formal market – supporting
institutions support firms moving into complicated
long-distance trade with a country because they

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can see reasons for specialization and growth in

size, and making long-term commitments to
international trade there.
- If property rights are protected, this will
fuel innovation, entrepreneurship, more economic
growth, and increased inward investment.

Article

A 12 Singapore Top Destination for Expanding Businesses

(Companies drawn to Republic’s stable political and social climate, survey
shows)

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Chapter 2: Political, Economic and Legal environment

Sample Examination Questions

1. a. What are the main political systems an international

business faces when operating in another country?
b. What are the main economic systems?
c. What are the main legal systems?
d. Describe the issues these differences can create for
an international firm.
e. How can these challenges be dealth with? Use
examples and cases to illustrate your points

Ans: (part d and e)

The differences in the aforementioned political, economic and legal

systems can create issues for an international firm.

For a collectivist political system, an international firm will be

confronted with rules and regulations that are aimed at increasing the
benefit of the wider community, rather than maximising its profits and
productions. For example, media conglomerate owner Rupert Murdoch
observed that his network-owned Star TV is a challenge to the
totalitarian regime of China. This remark angered the Chinese
government which in an effort to maintain the country’s collectiveness
subsequently blocked the broadcasting of Star TV.

For an individualism based political system, an international firm

will find that individuals will have their own diverse set of tastes and
preferences for a wide pool of products, from fashion to the car choices.
An example would be how in USA, supermarket chains such as Wal-Mart
will have different food produce on their shelves depending on which
state they operate in as locals will have varying tastes and preferences
for their food.

An international business can deal with the challenge posed by a

collectivist political system by firstly, being well aware of the rules and
regulations of the country they wish to operate in and comply with these
legislations. This has been dealt with by several large companies which
have compliance departments to ensure that their operations overseas do
not violate the formal institutions of the countries they are located in. As
for the individualism based political system, the business should produce
products to that satisfy all segments of the local market. It can follow
car company Toyota, which has produced cars for different income levels.

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For a market economy system, multi-national companies wishing to

enter a country will target industries where a significant demand of these
industries is present. For example, in Singapore, the real estate industry
is booming and foreign property MNCs have a keenness to enter the
Singapore market and gain a sizeable market share.

For a mixed economy system, the industries targeted may vary, but
the goal remains to enter the market where there is a high demand for
the relative industries. For example, there is a high demand for
biomedical and leisure industries in a mixed economy like Singapore, as it
continues to develop. This has seen MNCs from USA such as Pfizer and
Las Vegas Sands to set up their business operations here with one eye on
the rising demand in Singapore.

An international business can deal with the challenges of both a

market and a mixed economy by taking the opportunity to invest in the
relevant industries in the country of interest. For example, celebrity
chefs Gordon Ramsay and Jamie Oliver have established upmarket
restaurants in Singapore due to the exceptional demand of high quality
cuisine locally. Besides that, in the real estate industries, MNCs have also
made inroads into the Singapore industry by buying up shares in local
companies. For example, JLL have bought a 20% stake in PropNex in a bid
to grow its Singapore residential property business.

In the case of legal systems, the challenge for an international

business is that it must be aware of the various laws in place in that
country. These include property rights, product safety and product
liability, intellectual and patent rights.

An international business can deal with this challenge by

familiarising themselves with the various business and consumer laws in
place in their countries of business operations and of course, to also
strictly abide by and follow these legislations closely. For example, the
unique Lemon law in Singapore which protects consumers from being
exploited by businesses.

In conclusion, there are vast differences between the political,

economical and legal system for countries all over the world. These
differences will present different sets of challenges for an international
business when they decide to operate in other countries. However, the

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onus is on the firm to first familiarise themselves with the PEL systems
present in that country, and subsequently develop relevant strategies to
counter the respective risks and challenges it might face. This will allow
the firm’s overseas business to prosper and succeed.

Tutorial Questions

1. a. If you were going to start business in a foreign

country, what types of political, economic and legal
systems might you have to assess? (12 marks)

b. Consider how supportive or otherwise these different

systems might be for international business and the likely
business risks you would undergo with each system.
(8 marks)

c. Use country and case examples to illustrate your

points. (5 marks)

Student’s Essay

a. If you were going to start business in a foreign country,

what types of political, economic and legal systems might you
have to assess

As a business starting operations in a foreign country one must take note

of several factors to ensure smooth operations. There are three main
systems to take note of and assess to reduce uncertainty, transaction
costs and constrain opportunism. The three main systems are Political,
Economic and Legal. Each individual country has its own version of these
systems and businesses cannot simply apply what works in a country to
another.

Political systems involve how a country is run by its people. It is generally

two dimensional in the forms of collectivism against individualism and
Totalitarianism vs democracy. Government policies are based on these
principles and thus may affect the economy of that country. Collectivism
is primacy of the group over the individual. As such policies will be enacted
to benefit the majority of the people as a whole and will curtail individual
freedoms. Individual based governments are the opposite, where there are
more individual rights and freedoms and governmental control is limited
Totalitarianism is the system of government that is centralized and
dictatorial and requires complete subservience to the state. Almost all
functions of the state are owned by the government and are tightly

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controlled and monitored. A prime example of this is North Korea where

the state party is in complete control of the country.

Democracy on the other hand is a system of government by the whole

population or all the eligible members of a state, typically through elected
representatives. As such there is more freedom and the population is able
to choose for themselves. Such countries are typically the most developed
countries such as Norway, Sweden of Japan.

It is much easier to start businesses in states where democracy is

practised as there are open to outside influences and the population is
allowed greater choice. To succeed in Totalitarian states however, one
must be in the good graces of the ruling party and adhere to their rules
only then your business is allowed to operate there. An example of which
is Singaporean firms setting up supermarkets and restaurants in the
reclusive North Korea.

Economic systems are systems of production, resource allocation and

distribution of goods and services within a society are run. The three main
economics systems of note are as follows. Market Economy, where the
pricing of goods is determined by the free forces of demand and supply. As
such, Government intervention is not present. The demand of goods is
wholly dependent on the consumers within the market. Availability of
supply and the pricing of the goods are up to the discretion of the
businesses in the market. There is thus called an invisible hand in guiding
production. Where the increased demand spurs increased supply of goods
and the reduction of demand in turn curtains the supply. Examples
countries or states with this system are Hong Kong, New Zealand or
Switzerland. This system is advocated by Adam Smith.

In a Command economy, all resources available in a country or state are

under the direction of the government and in extremis all business is state
owned. This means natural resources to produce goods are in the hands of
the government. Factories and businesses are usually stated owned and
their production and output are subject to the government’s control. This
system is advocated Karl Marx. Countries that have this system are the
former Soviet Union and the current North Korea.

In a Mixed economy, the economy comprises of both state owned and

private enterprises. This economy allows the government to interfere in
economic activities to achieve social aims. Usually state-owned enterprises
are those in the public sector like utilities, transportation or Healthcare.
Other businesses in other sectors are privately owned. The Government
has control over these sectors as they are seen as the critical to the
welfare of the citizens. This system is advocated by Lord Maynard Keynes.

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Countries with this system include Singapore Canada and the United
Kingdom.

Legal systems are formal set of rules that regulate behavior of businesses
and individuals. These set of rules dictate what is allowed and not allowed
in a country and businesses and people in the country alike need to
respect and obey them. Through history individual states and countries
developed their own sets of regulations and countries may have wholly
different Laws. These sets of Laws are commonly grouped into three main
groups which are Common Law, Civil Law and Religious Law. Do note that
even in the categories stated above each individual country may apply the
law slightly differently when compared to similar countries in the group.

The first group is called Common Law. Common Law is developed through
traditions, customs and prior cases. The law is thus applied through Laws
and statues. The United Kingdom is the originator of common law where it
is still practiced and as such many commonwealth countries practice it too.

Secondly, Civil Law are laws that are Codified into books of Laws and
Constitutions. This helps Judges apply the Law into cases. The United
States is an example where the US constitution is the foundation of
federal law.

Finally, Religious Laws are countries where Religion is Important and that
their laws are based on their religion and religious text. Examples of these
are Islamic Sharia, Christian Law, Hindu Law and Jewish Halakha.

In conclusion as a business starting to operate in a foreign country, the

business must take into account the two-dimensional aspect of Political
systems of the country where it is a democracy or Totalitarianism, so as
to understand the ruling party and the people. Economic systems such as
mixed, command or free market to adapt to the economy and Legal
systems such as common, civil or religious law to prevent unintended
breaking of such laws which will incur heavy costs.

b. Consider how supportive or otherwise these different

systems might be for international business and the likely
business risks you would undergo with each system

For an international business expanding into a foreign country it will

encounter Three systems that will either help or hinder doing business in
that country. The systems include Political, economic and Legal systems.
Different countries have different systems and businesses must take note
how to benefit from them and prevent any unfavorable outcomes while
under these systems.

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Political systems are the system of how that particular country is run and
the political mindset of the people. The country the business originates
will also affect how the business operates. As a general rule business
should not do anything to greatly upset the ruling government as they will
make it impossible to do business in that country. In a Democracy, with
sufficient funding and political clout, international businesses can lobby
the current government to enact laws and regulations that favor them
against competitors be it local or foreign. Examples are which Shell has
local state support to access new gas fields in Mozambique or aerospace
manufacture Boeing has the US government support in achieving foreign
contracts to manufacture Civilian planes.

A risk due to a different political system may be due to the ruling party’s
ideology and values. If this clashes with an international business values,
the business may encounter severe penalties and may be forced out of the
country altogether. This can be encountered in Totalitarian governments
such as China or the D.P.R.K. these governments may set restrictive rules
such as censorship of sensitive topics. Google, unable to comply with these
rules was therefore banned in China. Nationalist sentiment may affect
business where the country of origin is seen as an enemy or aggressor may
also hamper businesses. During and after the Falkland island war British
business was seen as an enemy of the local Argentine government and
polices were enacted unfavorable to them.

Economic systems are how the economy of the country operates, it is a

scale of how much the government is interfering with the local economy.
It ranges from Free markets where there is little to no control, Mixed
economy where there is some control and lastly to Command economy
where there is near absolute control. In a mixed economy governments can
provide grants and subsidies to local SME to expand and become
international business this is seen in the cases of Breadtalk and Sake Sushi
expanding to Malaysia and Indonesia. A detriment to this system for an
international business is when the government intervenes and enacts
economic policies that limit the inflow of foreign MNCS to promote the
growth of local firms.

Legal systems are the laws and regulations of the land. For an
international business you are a guest of that land and thus subject to
the local laws and regulations , Business must comply with those laws lest
they face stiff fines and even expulsion. The three different systems of
law are civil common and religious law.

Civil law can benefit companies in the form of the introduction of patents,
copyrights or trademarks. Business take a long time to develop special

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ideas and branding is especially important as such the law will benefit
those businesses by clamping down on errant competitors that try to steal
trade secrets of copycats that try to pass off their products as the
genuine deal. This practice is common in developed countries such as in the
European Union.

However, businesses may run afoul of laws that are specific to a certain
country for example Indonesia has a mix of religious and civil law. As a
Muslim country, the majority of the population cannot consume pork
products. Ajinomoto, a Japanese condiment based company was discovered
to have used pork ingredients in their products. This outraged the local
populace and the civil and religious courts ruled that the company had to
pay a very steep fine and provide compensation to the affected parties.
The employees of companies were also subjected to jail terms.

Concluding, when entering a foreign market, international businesses must

be aware of the local norms and adapt to them to enable smooth
operations of their businesses. Various countries have their own way of
doing things and businesses must take in to account various systems such
as political, economic and legal systems to prevent any wrongdoing.
Reversely there are benefits to be found in such systems and to take
advantage of them is essential for a company to thrive internationally.

2015 Zone A and Zone B

‘Formal and informal institutions greatly affect and shape the
strategies that are possible in specific countries and markets.’
Therefore:

a. Describe, using examples, the major political, economic and

legal institutions an international business needs to take into
account in designing its strategy. (7 marks)

b. Describe, using examples, the major informal institutions an

international business needs to take into account in designing
its strategy. (7 marks)

c. Define PESTEL and SWOT analyses and describe, using

examples, how these can be used to develop an environmental
analysis for international business strategy development
(11 marks).

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Chapter 2: Political, Economic and Legal environment

Examiner’s Report

Reading for this question

The material for answering this question appears in Chapters 2, 3 and 4 of

Willcocks (2013) and Chapters 2, 3 and 7 of the subject guide.

Approaching the question

For a), political system, the examiners expected a discussion of collectivism

versus individualism, different types of ‘totalitarian’ and ‘democratic’
systems, with examples (2 marks). Economic systems discussed should
include market, command and mixed economies with examples (2
marks). Legal system should include common, civil and religious law with
examples (2 marks). Some discussion as to how these impinge upon an
international business (1 mark – total 7 marks).

For b), informal institutions covers cultural, social, language, religious

and ethical dimensions. Some discussion was expected of culture, types
and their importance (2 marks) as well as of the roles of language and
social class (2 marks) and the role of different types of religion and ethics
(3 marks). Candidates were expected to point out the relevance of these
institutions to international business (total 7 marks)

For c), the examiners expected political, economic, social, technological,

environmental and legal analysis to be described. An illustrative example
of PESTEL gained 4 marks. A discussion of strengths, weaknesses,
opportunities and threats should have been illustrated with examples. The
best answers provided a worked example of how strengths and
opportunities are used to gain competitive advantage, how strengths are
used to meet threats, how opportunities are used to minimise weaknesses,
and how strategies are generated to minimise weaknesses and threats
(7 marks).

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Chapter 2: Political, Economic and Legal environment

May 2016 Zone A

‘ Firms operating internationally must continually analyse the

environments of the markets they operate in and seek to
enter.’ Using iluustrative examples, answer the following
questions:

a. Describe what a PESTEL framework and Ghemawat’s CAGE

framework cover in terms of formal and informal institutions
and environmental factors that shape and constrain
international business strategy. (8 marks)

b. Define culture and assess the context, cluster and

dimensions approaches to understanding differences in culture
and their impacts. (10marks)

c. What are the main trends in globalisation? Describe the

advantages and challenges these present to firms operating
internationally. (7marks)

Examiner’s Report

Reading for this question

The material appears in the subject guide, Chapters 1, 2, 3 and 7, and

Willcocks (2013) Chapters 1, 3 and 4.

Approaching the question

On the whole well covered by many candidates the weakest answers being
on culture.

a. Candidates are expected to know political, economic, social,

technological environmental and legal factors, and cultural,
administrative, geographic and economic factors, and describe and
illustrate these in the time available.

b. Culture has many definitions (e.g. rules of the game) so two marks were
assigned for this and the rest for descriptions/assessment of cluster,
context and dimensions approaches.

c. Examples of trends include reduced barriers to trade, and capital

investment, increased FDI, growing affluence in many countries creating
more attractive markets globally. We expected up to six trends, and also
assigned four marks for discussing advantages (e.g. three marks for a
quick mention of six of these) and a further four marks for discussion

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Chapter 2: Political, Economic and Legal environment

of advantages (e.g. technological advances promote international trade,

lower barriers to trade and investment) and challenges (e.g. globalisation
promotes protectionism and regional barriers as a reaction; heightened
competition from diverse countries and industries).

Mock 2018

In a world consisting of approximately 200 countries, it is very

important for international managers to acquire country-
specific knowledge. In light of this fact, answer the following:

(a) If you were going to start a business in a foreign country,

what types of political, economic and legal systems might you
have to assess?
(15 marks)

(b) What are the possible business risks you are likely to face
with each of these systems? (6 marks)

(c) How can you overcome the liability of outsidership in this

foreign country? (4 marks)

Mr Nilesh’s Answer

(a) 15 marks
This part of the question requires a short comment on why knowledge of the
formal institutions in a country is useful for international managers and then
an explicit focus on the description of political systems, economic systems and
legal systems. Candidates can acquire detailed knowledge of all these matters
by referring to Chapter 2 of the Subject Guide, particularly pages 23 to the
end of the first paragraph on page 30.

(b) 6 marks
This part of the question requires a brief explanation of three issues, namely
the risks of uncertainty, the prospect of facing higher transaction costs and
the danger of opportunistic behaviour. Stronger answers would focus on some
of the issues highlighted in Section 2.5.1 on pages 30/31 of the Subject
Guide. Thus, mention can be made of issues such as protection of property
rights, safeguarding of intellectual property, product safety and product
liability and rules for corporate governance.

(c) 4 marks
This part of the question requires a brief exposition of the notion of liability
of outsidership. This is explained very well on pages 12 to 14 in the Peng and
Meyer textbook. Then candidates need to suggest two ways in which the
liability of outsidership can be overcome: these can be (i) through

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Chapter 2: Political, Economic and Legal environment

participation in a joint venture or a strategic alliance with a local partner

and, (ii) through seeking advice from a firm of business consultants.

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