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From the Third Opium War. 1997. nervousness on the part of the Hong Kong business community led the British government to initiate talks with the Chinese government about what would become of Hong Kong in 1997. so the Chinese government sought to halt its importation. the British and Chinese signed the Sino-British Joint Declaration in 1984. 2001 and by the resulting drop-off in airline traffic. The British wanted Chinese tea. Hong Kong will retain its separate political and economic status for 50 years (until 2047) and continue to enjoy the free-wheeling. and trading and industrial. which means heavy governmen-tal control. The Joint Declaration along with the Basic Law. China will continue its current economic structure. but its aviation and property divisions suffered due to the global economic downturn. provides a sense of direction for economic and political change. this time to Canton. Under the terms of the agreement. real estate in Hong Kong tends to be leased on a 15-year basis. The New Territories. marine services. the post-1997 Hong Kong constitution that China developed. Hong Kong became a Special Administrative Region of China. at that time. two systems. now known as Guangzhou. which allows Hong Kong to operate under a different legal.listed on a stock exchange) with diversified interests under the control of five operating divisions: property. presided over by a governor appointed by the queen of England. trade between China and the West had been flourishing. it was considered a British colony.” meaning that Hong Kong and China-together. “one country”-will have two government systems. In the late eighteenth century. The people of Hong Kong . the British protested. Once the Joint Declaration of 1984 established a date for the turnover of Hong Kong to China. Until the early 1980s. China assumed control over Hong Kong on July 1. especially with Britain. the British began to push for democracy. These restrictions resulted from a long his-tory of mutual distrust and misunderstanding between the Chinese and foreigners. The agreement called for “one country. How could Hong Kong’s new political status be a problem for Swire? Until the mid-seventeenth cen-tury. So in 1982. which was complicated by the terrorist events of September 11. China sought to minimize its contact with foreigners by restricting foreign trade to the port at Macao. which comprise 90 percent of the land area of Hong Kong. which is 75 millions south of Canton. they gained Kowloon. The first O pium War gave the British permanent ownership of the island of Hong Kong and its harbor. bev-erages. Cathay Pacific Airways of the aviation division.scape in Hong Kong. experi-enced a 90 percent decrease in profits over the course of the year. they again sought to restrict foreign trade. the Chinese wanted the opium that British traders shipped in from India. political parties began to form.1997. However. its use was widespread. Not surprisingly. The results were three Opium Wars between the two countries within a period of 21 years (1839-1860). free-market economy that has flourished there. Democracy has never been a major part of the political land. In 1990. aviation. China emerged the loser. the parties won the right to be represented in Hong Kong’s Legislative Council (Legco). came under British control in 1898 under the terms of a 99-year lease that expired on June 30. the Chinese opened more of their ports. and in 1991 for the first time. Despite the history of restrictions. and economic system from the rest of China. and that was quashed by the local business elite. the issue of the 99-year lease’s expiration was dormant. Although opium was illegal in China. In all three. but by the middle of the nineteenth century. After prolonged negotiations. Swire’s profits in 2001 were marginally higher than in 2000. Only once in the first 140 years of British rule did Hong Kong consider representative rule. The major contributor to Swire’s overall profits. Until Hong Kong reverted back to China. political.
More important. Mr. For the company to succeed. Some fear this development nicks away at the freedom in place by putting more power in the chief executive position and in the appointees that Beijing will choose. Can it oper-ate successfully in China doing the same things it does in Hong Kong. Western investors who want to do business in China constantly approach Swire. a 400-person committee appointed by the Chinese government voted for Hong Kong ship-ping magnate C. Jardine Matheson group. On the political front. In 1996. the largest mea-sure of change in political structure was enacted when policy makers established a ministerial system of political appointees to replace the civil servants.directly elect only a small percentage of Legco’s members. The Basic Law provides that 50 percent of the legislature may be directly elected by the people by 2004 and that full democratization should be discussed in 2007.2002. Tung as the first chief executive to run Hong Kong beginning July 1. Swire management is clearly concerned about Swire’s future in Hong Kong and China.nesses. Under direction from China. 1997. Tung has been LESSON 15 THE POLITICAL AND LEGAL ENVIRONMENT FACING BUSINESS 142 11. Chinese partners could become more influential and sophisticated and might rely less on Swire’s partner-ship. no one dared run against China’s favorite Mr. sig-’1ificantly reducing its influence in China and its ability to grow as China’s economy expands. Swire even removed the Union Jack from its Cathay Pacific aircraft and repainted the aircraft an oriental jade color. although China has encouraged a new era of democracy in Hong Kong. Tung in the 2002 elections. its management must carefully analyze whether its corporate policies will fit a desirable political and legal environment.ment correct in pegging its future to the future of China. a country that is stable politically but searching for the best accom’T1odation between a market economy and a totalitarian political regime? And as China continues to posi-tion Shanghai as a major business center in China. have some 90 percent of their assets in China and are involved in many Chinese joint ventures. and businesses have a free hand to run as they always have. Companies are taking different approaches to deal with the transition in Hong Kong. or must it .ployment because of the collapse of the local property market the fall of the dollar.154 © Copy Right: Rai University INTERNA TIONALBUSIN ESS M ANAGEM ENT slow to make sweeping changes in Hong Kong that will align it more closely with China. O ne of its rival hongs. John Swire & Sons. H. however. and China appoints the rest. Freedom of speech and demonstration still exist. Swire has chosen to establish a close working relationship with China by entering into partnerships and selling division stakes to Chinese firms. Swire is cooperating directly with China in a significant way. However. and competition from China’s emerging cargo ports. The Swire family and its British -based parent company. Hong Kong has been hit with a recession and record unem. O n July 1. will that lessen Hong Kong’s importance? Introduction Multinational enterprises (MNEs) like Swire must operate in countries with different politi-cal and legal conditions. Many believe that Mr. ensuring him another five-year term beginning in July 2002. Rather. or will Swire’s top management and the other business leaders in Hong Kong still have significant influence? Is Swire manage. they have made small gradual changes that ensure a stable transition. Will Swire management be able to negotiate the political environment that is arising in Hong Kong? Will the trend toward democracy reduce Swire’s influence and control. has resisted attempts at Chinese ownership and even moved its legal headquarters to Bermuda to reduce its exposure to Hong Kong’s uncertainty. Tung is unable to help Hong Kong’s deteriorating economy because his interests lie with pleasing Beijing instead of acting in Hong Kong’s best interest. China could seize its busi. just as it did in Shanghai many years ago.
Sometimes a CEO will try to influence the home-country govern-ment on policies that affect countries in which the firm is operating. Political change or validation may come in many forms. Copyright © 1984 Gabriel A. different points of view that are articulated by key constituencies. indi. The key is to make sure that the company doesn’t look as if it’s trying to influ-ence laws inappropriately. governments identify policy alterna-tives and then choose a specific policy that it will pursue. 3rd ed. such as politicians. and other constituencies. legislatures.154 143 INTERNA TIONALBUSIN ESS M ANAGEM ENT entails lobbying activ-ities. Bingham Powell. functioning unit. A political system integrates the parts of a society into a viable. or other special-interest groups.1 Political and Legal Influences on International Business Figure 5.1 shows how political and legal factors are part of the external environment that influences managerial decisions. In the case of Hong Kong.2 The Political System And Its Functions Governments formulate policy alternatives based on the inputs of different foreign and domestic entities and then implement the policies. T place then tests the outputs of these policies and revises them as necessary.ers. Federal Express. Jr. for example. The liberal ideology of the Democratic Party and the conservative ideology of the . by Gabriel A. BellSouth. and Lockheed Martin Company. Almond and G. Political policies are established by aggregating..adapt its operating strategies to fit the political and economic climate in China? This chapter discusses the political and legal systems that managers encounter and the factors they need to consider when operating in different countries. Then the CEO may want to work closely with a country’s key decision makers in the policy formulation stage. business has always been the key con-stituency regarding decisions about what government policies are to be established. businesses. The photo shows throngs of people waiting to vote in Zimba. and aims that consti-tute a sociopolitical program. Given the interests of different constituencies. government bureaucra-cies. Ba s ic Po lit ica l Id e o lo g ie s A political ideology is the body of constructs (complex ideas).2 illustrates the development of political policies and their implementation. which © Copy Right: Rai University 11. Figure 5. courts. an organization of over 250 companies doing business in China. In Hong Kong. when the United States granted permanent normal trade relations to China.3 The council includes companies such as Philip Morris. Note that males and females wait in separate lines. the chief executive officer (CEO) of an MNE watches policies as they develop and makes sure that the company voices its concerns in the interest articulation stage. Finally. FIGURE 5. The United States-China Business Council. other interest groups are emerging to balance off the needs of business. lobbies on behalf of its members for stable and expanded U.bwean elections. Almond and G. However. Normally.S. Source: From Comparative Politics Today: A World View. theories.viduals. AT&T. A major challenge of the political system is to bring together people of different ethnic or other backgrounds and to allow them to work together to govern them-selves. with the government exerting more influence and control in the business environment. Bingham Pc Reprinted by permission Addison-Wesley Educational Publish. that decision had to be made annually. the political change that resulted when China took control in 1997 worried many managers because they believed that China would change the relationship between government and business.-China economic links. or bringing together. A country’s political system influences how business is conducted domestically and internationally. The policy is then implemented. and it may be altered depending on the reactions of political parties. the CEO may voice the company’s stance on policies once they have been implemented. that is beginning to change. The Political Environment Figure 5. Prior to 2000.
The resulting political instability has made it difficult for them to attract foreign investment and for managers to feel comfortable operating in and committing resources to them. uses Taiwanese shoe manufacturers to invest in China and to manufacture shoes using Chinese labor. The belief is that a common Chinese heritage will enable Hong Kong and China to merge together faster than countries with very different eth-nic ties. and Yugoslavia after World War I. Czechoslovakia. and 144 11. Foreign companies that have had experience in Taiwan. The country’s Croats and Serbs were on opposite sides during World War II. When operating in a foreign country. meaning that different ideologies coexist within them because there is no one ideology that everyone accepts. Nike. Muslim Bosnians. comprised peoples that were ethnically and religiously very different from each other (Roman Catholic Croats.g. In fact. Afghanistan). Taiwan. or religion (e..3 presents a general schematic of the various forms of government. Hong Kong. An example . Differing ideologies in countries such as Yugoslavia and the Soviet Union already broke those countries apart during the 1990s. tribal groups (e. These and other cultural dimensions strongly influence the political system..g. countries often were formed from different ethnic groups held together by totalitarian rule.g. and Singapore the Chinese Economic Area. An example of a conservative democracy is the United States during the presidency of George Bush. it is easier for Nike to use its Taiwanese partners than to manufacture shoes on its own. The more different and strongly held the ideas are. South Africa). Romania. With the advent of communist rule after World War II. and Croats were accused of murdering thou. political disagreements notwithstanding.Republican Party in the United States are examples of political ideologies. government calls mainland China. Hungary. ideologies also help to bring countries together. Pluralism arises because groups within countries often differ significantly from each other in language (e.sands of Serbs. Yugoslavia. the former Yugoslavia). India). The breakup of the commu-nist bloc in 1989 resulted in the disintegration of countries such as Czechoslovakia. and political ideology have greatly affected national boundaries. and ethnic Albanians who lived in the southern Yugoslav province of Kosovo). This makes it difficult for the manager to determine how to articulate the firm’s interests and how to influence policy making. might find it difficult to understand the political environment in a country where there are many different ideologies even within the political parties themselves. for example. Most modern societies are pluralistic politically.g. One reason China wants Hong Kong back is because of ethnic Chinese ties. ethnic back-ground (e. the Soviet Union. for example. where there are only two key political parties.. Greek Orthodox Serbs. language. and Singapore can use that experience-and local management-to help them operate successfully in mainland China. Managers from the United States. However. for example. culture. the U. religion. A Political Spectrum Figure 5. The Muslims in Bosnia and Kosovo were holdovers from the Ottoman Empire. Because of the strong ethnic Chinese ties between Taiwan and China. The ultimate test of any political system is its ability to hold a society together despite pressures from different ideologies that tend to split it apart. The Impact of Ideological Differences on National Boundaries Differences in history.S.. In Europe.154 © Copy Right: Rai University INTERNA TIONALBUSIN ESS M ANAGEM ENT Yugoslavia due to the loss of totalitarian control and to ethnic and other differences. Hong Kong. it is important that managers understand its history and the present ethnic groups that could cause political tension and instability. the more difficult it is for a government to formulate policies that every-one can accept. the Austro-Hungarian Empire broke up into Austria.
and that coun-tries in between are partly free. “Not free” countries deny their citizens basic rights and civilliber-ties. democratic governments range from radical on one side (advo. or civil war. “Partly free” countries enjoy limited political rights and civil liberties. and freedom to organize 2. An accessibility to the decision-making process Political Rights and Civil Liberties A key element of democracy is freedom in the areas of Political rights and civil liberties. ethnic strife. with high regard for individual rights and property 5.3 The Political Spectrum Although purely democratic and totalitarian governments are extremes. •The degree of freedom from extreme governmental indifference or corruption. •Equality under the law for all individuals. China is an example of a communist totalitarian government. Figure 5. lie somewhere in between. and Myanmar is an example of a fascist total-itarian government. more than double the number of countries that were called democracies in the early 1970s. •The ability of voters to endow their elected representatives with real power. Consequently. there are variations to each approach. •The ability of people to organize into political parties or other competitive political groupings of their choice.tion in each category. Elections in which voters decide who is to represent them 3. weak rule of law. citizens elect representatives to make decisions rather than vote on every specific issue themselves. whereas 58 countries were partly free and 48 were not free. The major indicators for civil liberties are •The existence of freedom of the press. In 2002. press. Freedom of opinion.of a liberal democracy was the United States during the presidency of Bill Clinton.6 The Freedom House survey identifies the number of countries in each category as well as the percentage of the world’s popula. An independent and fair court system. 86 of the world’s 192 countries were classified as free. expression. The major indicators for political rights are •The degree to which fair and competitive elections occur. The 121 electoral democracies represented 63 percent of the world’s countries? What some call the “third wave” of democratization started in the early 1970s . who believed that all citizens should be equal politically and legally. •The existence of safeguards on the rights of minorities. In reality.4 illustrates that countries high in both political rights and civil liberties are free. Figure 5. The ideology of pure democracy derives from the ancient Greeks. often in the context of corruption. In 2002. that countries quite low in both political rights and civil liberties are not free. and so full participation by citizens in the decision-making process has become impossible in these modern times. a New York not-for-profit organization that monitors political rights and civil liberties around the world. society’s complexity increases as the population increases. Freedom House. should enjoy widespread freedoms. Former British Prime Minister Winston Churchill once called democracy the worst form of government-except for all the others. The majority of democratic governments. it noted that there were 121 electoral democracies. MNEs may be able to operate equally effectively in democratic and totali-tarian regimes. most democratic countries practice various forms of representative democracy.cies usually have economic freedom and legal rules that safeguard individual (and corporate) rights. has published a list of countries ranked according to the degree to which these freedoms exist. •The extent of personal social freedoms. For example. Each year since 1941. how-ever. and should actively participate in the political process. but democra. Limited terms for elected officials 4. Let’s now learn about the world’s major political ideologies. in such cir-cumstances. Contemporary democratic political systems share the following traits: 1.cates of political reform) to reac-tionary (advocates of a return to past conditions). A nonpolitical bureaucracy and defense infrastructure 6.
and destabi-lization from abroad. Egypt. Minority governments tend to be unstable because the coalition can fall apart. Companies may have difficulty determining how to act in decentralized democratic systems because such companies face many (sometimes conflicting) laws.S. people directly elect a president and a legislature. Mexico. 1990. Those classified as “partly free” tend to be average to just below average in political rights and civil liberties. 1998 and 2002. Burkina Faso. Not free countries include Algeria. corruption. because of .4 Source: Adrian Karatnycky.2 Not free 42. Adnan Karatnycky.1 23. North Korea. Israel is an example of a democracy in which there are so many political parties that the government in power is usually a minority government (it has earned less than a majority of the votes) that is formed from a coalition of several minority parties. militaries and oligarchies (ruling power in the hands of a few). South Africa. Ariel Sharon was elected Prime Minister of Israel in 2001. Bahamas.4% Partly free 21.9 1981 1990 1998 2002 Free 35. Examples of free countries include Australia.7% 41. and not free conditions in 1981. forcing a new governing alliance to form. partly free. Canada. There are also hybrids of each form.9% 21. such as the presidential form in the United States. Those classi-fied as “not free” tend to be quite low in both political rights and civil liberties. For example.154 145 INTERNA TIONALBUSIN ESS M ANAGEM ENT the former Soviet Union are examples. and Russia. There is still concern over whether these democracies will continue on the path to freedom in political rights and civil liberties. Indonesia and many of the former republics of © Copy Right: Rai University 11. establishing a broad unity govern.9% 38. Their instability stems from internal divi-sion.6 21.4 Comparative Measures of Freedom Countries classified as “free” in a political sense have a high degree of political rights and civil liberties. Democracies differ not only in the amount of citizen participation in decision making but also in the degree of centralized control. For example. The parliamentary form of democracy in the United Kingdom is an example. even though it has a stronger federal government than Canada does. Source: Original art based on Freedom House survey. Many democracies have only a few dominant parties. adding to the economic and security problems Israel faces.2 35. Brazil. and South -Korea. Nigeria. Estonia. But the Labor Party withdrew its support in November 2002 and forced news lections to be called in early 2003. people vote for their representatives -or ruling party-and the ruling party selects the prime minister. but people vote directly for the prime minister as well. Israel has a parliamentary government like that of the United Kingdom. and Zimbabwe. Freedom in the World 2001-2002: The Democracy Gap The problem facing international business managers is the democracies that have emerged since the early 1970s are fragile and unstable. Figure 5. Malaysia. Belgium. However. Canada. Freedom in the World (New York: Freedom House 1995). In other democracies. gives significant political power to the provinces at the expense of its federal government. Iraq.ment with representatives from at least eight different parties. China.8 The following identifies the percentage of the total population living in free. A major difficulty in negotiating the Canada-U. Free Trade Agreement (FTA) was that many provinces had their own trade barriers.3 39.8 39. Chile. so it usually is not difficult for them to form a government. Kenya.and is still underway. In some democracies. For example. Partly free countries include Albania. for example. The United States also considers states. Saudi Arabia. who is the chief executive of the country. Ethiopia.5 39. Czech Republic. Japan. rights important as a counterweight to encroaching intervention and control by the central government. This inherent instability in the political environment in Israel is a product of the need to form a coalition government of political parties with divergent interests in the 2bsence of an outright victory in the elections. Cambodia.
China has struggled to control access to the Internet and has blocked certain Web sites. In surveys on democracy in the United States. the political and legal systems of France and Japan are more highly centralized.pled to 38.S. In addition. In secular totalitarianism. This number has steadily dropped to a low of 26 percent in 1998. 75 percent of people in democracies strongly feel that democracy is the best form of government. giving managers instant access to a lot of information that can help them in the decision-making process. foreign compa. The loss of faith in political institutions and the feeling that professional pressure groups and lobbying organizations are increasingly more influential than individuals are causes of concern in democracy. religious leaders are also the political leaders.tarianism. Stability in Democracies Churchill’s quote on democracy implies that democracies are not perfect. In the 1950s. Not only are com-panies using the Internet to get their message across to potential investors and customers. and it allows elected representatives to keep more in touch with constituents. In contrast. Examples of this form are found in Cambodia.3 showed. The public’s confidence in the U. In theocratic totali. In a totalitarian state. headquarters carefully. The United States-China Business Council has an Internet site with special services for its members. Totalitarianism As Figure 5. it is clear that confidence in politicians and government has continued to decline over the past quarter century. This form is best exemplified in Islamic countries such as Iran. so do mature democracies. they can get a wealth of information about their own country as well as the outside world information that the government may try to restrict. both democratic and totalitarian. so are politicians and lobbyists. In addition. and totalitarianism is at the other. because democracy still needs specialists who can interpret and compromise. Just as new democracies have 146 11. the percentage of people who vote is declining. Where people have access to the Internet. 75 percent of Americans trusted the U. Government documents that used to be available only through hard copy or CD-RO M are now available on the Internet. the Internet has an impact on totalitarian societies.S. The essence of politics is communi. People are concerned about whether or not politicians are trustworthy and care about voters. Totalitarian governments are usually theocratic or secular. Between 2000 and 2002. democracy is at one end of the political spectrum. the government often imposes order through military power. and Iraq (under the rule of Sad dam Hussein). The Internet will not replace elected representatives. its highest level in 30 years.cation. it is estimated that the number of Internet users in China quadru.154 © Copy Right: Rai University INTERNA TIONALBUSIN ESS M ANAGEM ENT problems. government rose after the September 11 attacks to 55 percent. a very difficult proposition. Companies consequently find it easier to deal with those countries’ systems because there is less variation from one part of the country to another. Mghanistan (before the overthrow of the Taliban regime in 2001). individual. and the Internet has made communicating that much easier and cheaper. Access to more infor-mation could reduce the power of totalitarian regimes.5 million. but the Internet makes it easier to find the information on which to base an informed decision. The Internet is having a big effect on government. such as the homepage for Time magazine. In spite of this.S. and the government moved more aggressively to identify inappropriate Web sites and to monitor the activities of cyber cafés.different state tax systems in the United States. government most or pretty much all of the time. or group of . a single party.nies need to locate their U.
ian control over the political process. and Vietnam.4. Communists believe in the equal distribution of wealth. All countries considered not free and many considered partly free in Figure 5. Portugal under Salazar. Latvia. Authoritarianism differs from fascism in sofaras the former simply desires to rule people.individuals monopolizes political power and neither recognizes nor permits opposition. outside of it no human or spiritual value may exist. Only a few individuals participate in decision making. which entails total government ownership and control of resources. They have a majority Muslim population and are frequently forced to confront the pressures of fundamentalist Islam. Thus understood Fascism is totalitarian and the Fascist State. As communism moves toward democracy. the degree of instability increases. and Lithuania free. 2. Examples of fascist totalitarianism in the past include Italy under Mussolini. however.4 are totalitarian. The Eastern European countries and the former Soviet Union have moved away from communism to various degrees of democracy. Germany under Hitler. opera-tional restrictions that impede the company’s ability to take certain actions. 3. With few exceptions. Although political risks can occur in democratic as well as in totalitarian political regimes. Although one usually thinks of polit-ical risk as a situation in which one is not able to operate in . Mussolini (Italy’s dictator from 1924 to 1943) defined fascism as follows: “The Fascist conception of the state is all-embracing. interprets. and agitation that disrupts sales or causes damage to property or personnel. They are multiethnic societies in which power is not held by a dominant ethnic group (one that represents over two-thirds of the population). they need to be aware of political risk. Political risk is when international companies fear that the political climate in a foreign country will change in such a way that their operating position will deteriorate. the link between economics and politics in communist countries has been weakened. China. making countries such as Estonia. The Impact of The Political System on Management De cisio n s Po lit ica l Risk As managers evaluate a country as a potential place to do business and as they struggle to suc-ceed once they have committed resources. Freedom House notes that 90 percent of the “not free” countries share one or more of the following characteristics. They are noncommunist or postcommunist transitional societies. creating problems for foreign companies interested in doing business there. North Korea. either with or without compensation. Examples of authoritarian totalitarianism include Chile under Pinochet and South Mrica prior to the end of apartheid and the initiation of black rule. including fascism. Types and Causes of Political RiskPolitical actions that may affect company operations adversely are government takeovers of property. Communism has failed in most parts of the world. and commu-nism. to convert them to its own faith. much less have any value. are still communist countries with strong centralized authoritar. Totalitarianism takes several forms. whereas the latter desires to control people’s minds and souls. they tend to be more prevalent in totalitarian regimes. Accompanied by political change are economic change as these countries move more toward the market model. Communism is a form of secular totalitarianism in which political and economic systems (and philosophies) are virtually inseparable. develops and lends additional power to the whole life of a people. As these countries move from totalitarian to democratic states. most totalitarian governments have been opening up and liberalizing since 1989 when the Berlin Wall fell and the Soviet bloc broke apart. 1. As noted earlier. and Spain under Franco. as a synthesis and a unit which includes all values. totalitarian regimes fit primarily in the “not free” category in Figure 5. authoritarianism.
Unrest may occur because of economic conditions. they are macro political risks. Animosity between the host country and the foreign investor’s home country may result in work.154 147 INTERNA TIONALBUSIN ESS M ANAGEM ENT foreign investment are much less positive. after the beginning of the U. anti-American protesters in Pakistan burned a KFC restaurant. A good example of this risk took place in Argentina at the beginning of 2002 during the height of its economic crisis. especially war.a specific country because of polit-ical instability in that country.tions if they act in a socially irresponsible manner. 2. For example. human rights viola-tions. and the leaders could be replaced by force or election with politicians whose views toward business and © Copy Right: Rai University 11.S. bombing of Afghanistan in October 2001. There is also evidence that firms are apt to face adverse political situa. and the loss of supplies and markets. shipment delays. many U.Opinions of political leadership. leaving the investor to operate in a smaller market or forcing him or her to leave the market. work stoppages. after the communist revolution in Cuba. such as limits on remittances or discriminatory taxes. they are known as micro political risks. the forced divestment of operations. This is not as much an issue now as it was in the 1960s. Animosity. monopoly position. groups opposed to doing business with Myanmar have put up Internet sites criticizing U. Similarly. between the host country and any other country may result in property damage and the inability to get supplies or to deliver goods. widespread crime. the takeover of property was aimed at all foreign investors regardless of industry or nationality.S. 3. Civil disorder. when a number of countries declared their independence from previous . like McDonald’s. or of whether or not the investors’ past behavior had been socially responsible. Conditions may result in procurement difficulties.stoppage protests. or group animosity within the society. If carried to an extreme. For example. Changes may result in adverse operating regulations. hop-ing to exert the same kind of pressure that forced many companies our of South Africa. policy and U. companies with invest-ments in South Africa faced boycotts in the United States by groups that were morally opposed. and a Shell gas station. The manager of London-based HSBC’s Argentina sub-sidiary mentioned that he felt about as popular as a serial killer. importance to their home country’s national defense. External relations. there are other ways that political risk can affect a company. a McDonald’s restaurant. the nation itself may break apart. protesters may target only the most visible companies from that foreign country. Groups of street protesters and rioters started targeting and attacking mainly foreign-owned banks. and property damage. Political risk may occur for the following reasons: 1. when the government froze withdrawals from bank accounts to prevent complete depletion of cash from the banking sector. may result from inadequate police control. Micro and Macro Political Risks If political actions are aimed only at specific foreign investments. Such changes may lead to the breaching of existing contracts or the takeover of the investors’ property. and dependence of other industries on them. Companies most likely to be affected by micro political risk are those that may have a considerable and visible impact on a given country because of their size.S. Political leaders’ opinions may change over time. companies doing business in that country. to apartheid. If agitation’s cause is animosity between factions in the host country and the govern-ment of a foreign country. Further. If political actions affect a broad spectrum of foreign investors. such as the kidnapping of personnel. during the period of apartheid in South Africa.S. Many banks operated with wooden and steel plates covering their windows. For example.
as in the case of Japan.tive inside. Because there was no need to focus on military and defense. Japan’s key government institutions were the Ministry of International Trade and Industry (MITI). management must deal with governments that influence the economy in different ways. There are two ideological paradigms on the role of govern. They believe in the limited role of government as well as in checks and balances. Government Intervention in the Economy As companies move abroad. Communitarian coun-tries may do the same. and the Economic Planning Agency. a condition that is still true today. significant conflict exists within government regarding how and to what extent it should regulate international business activities for U. authoritative. managers also must realize that governmental action is not always 148 11. such as entry barriers and insufficient consumer knowledge and power. or autocratic. The government told companies to focus on scale (large size. it could put its efforts into infrastructure and the economy. the Ministry of Finance.S. Individualistic states believe in regulation. Today. least lots of cooperation among competitors) rather than on small entrepreneurial activities. These institutions funded preferred industries and controlled access to technology. It is very hierarchical and may be either democratic. Its main objective was to influence the government on poli-cies responsive to its wishes. At the time. as in the case of China. Individualistic countries bring business activity into line with the needs of the community by promoting marketplace competition and by regulating the marketplace in those instances in which competition by itself is unreliable or unacceptable. Japan had to rebuild its economy. In addition to understanding government functions. foreign exchange. The individualistic paradigm believes in minimal intervention in the economy. After Todd War II. The communitarian concept has spread to other Asian countries more anxious to mirror the examples of Japan and China than the more individualistic example of the United States. the Keidanren. Japan decided to insulate its economy from outside competition. government tends to be prestigious. In a communitarian paradigm. and they are likely to be democratic and econom-ically free. such as when a company might be able to establish a monopoly position or degrade the environment. but they will not intervene too much. and they have a high distrust of central gov-ernment power. that decision made it difficult for foreign companies to establish a market position in Japan. most countries realize that they need the stability of foreign direct investment in order to grow. an organization of the top companies in Japan. Government is essentially separate from business.phy can affect business. centralized bureau-cracy with a stable political party or coalition in power. but they also establish a partnership with business. It also encouraged companies to focus on export to high-income countries. even though it was highly competi. It had good political stability and a highly educated workforce. No specific government agency deals with . It thrives on a respected. the Bank of Japan. Japan is a good example of how the communitarian philoso. and sometimes authoritarian.ments: individualistic and communitarian. firms operating outside of the United States. and imports. However. for example. In response.colonial powers. In the United States. It focused on recovery rather than reform of its basic system. They will handle market defects. helped establish a consensus within the business community.154 © Copy Right: Rai University INTERNA TIONALBUSIN ESS M ANAGEM ENT consistent. Government’s role was to establish a broad vision of the future and then set incentives and sanctions to accomplish these objectives. which permits large production runs and lower costs per unit) and concentration (few competitors in an industry or &.
There are certain steps that a company must follow if it wants to establish an appropriate political strategy in its countries of operation. the United States-China Business Council is a lobbying organization that represents the interests of its members to the appropriate people in the U. What are the key objectives.Identify the issue. Does the government feel strongly about the specific issue. As the ethics of government-business relationships have become more important -even in totalitarian countries-companies have greater reason to examine carefully their policy formulation and implementation strategies. State is responsible for the overall political relationships between the United States and other countries. courts. Japan. managers need to know how decisions are made that could influence their ability to operate. environmental standards. important personalities? 5.S.Determine the impact of implementation. competitive. but the Defense Department might veto such sales in the name of national security. government agencies share responsibility for regulating nonagricultural exports: the State Department.Identify important institutions and key individuals. it might seem perfectly logical from a commercial standpoint to sell satellite technology to China. the council is able to wield a degree of . and the likely effectiveness of alternative strategies? 6. while in Germany. In the United States. Japan. or is it of minimal concern? Is there a political dimension to the issue. What is the specific issue facing a firm. For example. in the United States. government. A company also can attempt to influence government action from consumers and others b}-using a grassroots campaign or by building coalitions of different groups that share the company’s interests. When dealing in the political arena. companies.international issues. lobbyists represent con-stituencies and perform the important role of aggregating ideas and communicating them m decision makers. three _ communitarian countries.domestic or foreign-hire lobbyists to educate and persuade government decision makes about the merits of their position. the major alternatives. What will be the public relations fallout in the home and host countries if the action taken is unpopular? 7.S.Formulate strategies. 1. worker rights? 2. at least three different U. In a representative democracy. suppliers.Assess the potential political action of other companies and special-interest groups. or South Korea. Formulating and Implementing Political Strategies Formulating political strategies often is more complicated for managers than formulating competitive marketplace strategies. These agencies often have different viewpoints on how to regulate exports. and competitors. company moves from the United States to Germany. relationships may be arm’s length.Select the most appropriate strategy and implement it. so conflicting policies can exist.gies likely to be? 4. As noted earlier in the chapter.Define the political aspect of the issue. the Department of Defense. Because of both its size and the importance of its members. Implementing a strategy means marshaling whatever resources are necessary to accom-plish the company’s political objectives. Defense is responsible for national defense. customers. or is it some-thing that can be dealt with outside of politics? 3. and adversarial. and South Korea. Are they legislatures. and the department of Commerce. regulatory agen-cies. Without the freedom of expression-such as lobbying-democracy could not exist. and Commerce is responsible for facilitating commercial-including export-activities. .trade barriers. it may have to develop new strategies for its relationships with government. they may be much more cooperative. Who are the parties that are affected and able to generate political pressure? What are their Strate. Then they need to blow what the rules are for trying to influence political decisions. For example. If a U. For example.S.
Report Cancel This is a private document. When it declared its independence in 1988. companies sometimes abuse their power by engaging in bribery and other illicit activities. when the Soviet Union broke up. Since then. Join Free! www. Info and Rating Reads:9.631Uploaded:10/02/2009Category:Business/Law>MarketingRated:The Political and Legal Environment Facing Business barriers bankingbanking facesanimositylocal businesseffects internationalpolitical aspects(more tags)barriers bankingbanking facesanimositylocal businesseffects internationalpolitical aspectslegal lawpolitical barrierskong effectsbranchsituationsfacing bussiness(fewer) Followanu ranjan Ads by Google Barclays International An international offshore account with Barclays Wealth. Sometimes a totalitarian regime might seem more stable because it doesn’t have to deal with the pressures of democracy. Mozambique was a colony of Portugal.barclays.Zoosk. In another example. The Legal Environment Closely related to the political system the system is another dimension of the external environment that influences business. foreign com-panies that had entered into contracts with the former central government found that these contracts were not binding on the individual republics’ govern. however. it forced Portuguese investors out ‘of the country. Legal systems differ in terms of the nature of the system-common law. for example. As noted in the opening case.influence that would not be possible for a single company. the changes for business tend to be larger and more rapid than change typically is within a democracy. a change in government caused significant change in investment strategies. In general. the nature of the legal profession. and theocratic law-and the degree of indepen-dence of the judiciary from the political process. civil law. please follow these directions to submit a copyright infringement notice. and the legal relationships that exist between countries. However.ments. Management must be aware of the legal system in the countries tries in which they operate. both domestic and international.com/malta Zoosk® Dating Site Online Dating That Works 50+ Million Singles. there was some concern in 1999 that Hong Kong was moving away from the legal traditions established by the British toward the influence of Beijing. Even though the colony might have seemed stable.com Cheap Malta Holidays . foreign companies can influ-ence democracies through lobbying. some of the Ads by Google The Political and Legal Environment Facing Business Download this Document for FreePrintMobileCollectionsReport DocumentReport this document?Please tell us reason(s) for reporting this document Spam or junk Porn adult content Hateful or offensiveIf you are the copyright owner of this document and want to report it. telling them to abandon their investments. For example. Also. Companies had to renegotiate the contracts or pull out of the country. Part of the problem in establishing a global political strategy is that democracies and totalitarian regimes deal with companies differently. Find out more offshore. But when such a regime is overthrown. Mozambique has invited back many former Portuguese investors in an effort to rebuild the economy.
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