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Chapter 3:

Political and Legal

Systems

Learning Objectives

3-1 Explain how politics and laws influence business

3-2 Interpret political risk
3-3 Appraise the principles and practices of the legal
environment
3-4 Describe key legal issues facing international
companies
3-5 Relate the ideas of politics, law, and the business
environment

Opening case
• 3-1. Identify three compelling economic
reasons to invest in China. Then identify three
compelling political reasons to avoid doing so.
Recommend a criterion one could use to trade
off the opportunities of operating in China
versus the risks of doing so.
• 3-2. What sort of operational safeguards
would you advise a company to adopt in order
to better manage the risks of China’s legal
environment?

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Corruption Perceptions Index 2011

Political system
• The political system of a country shapes its
economic and legal systems.
• Political system:
– (1) specifies institutions, organizations, and
interest groups and
– (2) defines the norms and rules that govern
political activities.
• The mission of a political system is clear-cut:
integrate different groups into a functioning,
self-governing society.

Political System
=
System of Government in a Nation

(Charles W.L. Hill, 2015)

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Political system
• Political systems can be assessed
according to two dimensions:
– The degree to which they emphasize
collectivism as opposed to individualism.
– The degree to which they are democratic or
totalitarian.
• These dimensions are interrelated;

Political system
•The doctrine of individualism emphasizes
the primacy of individual freedom, self-
expression, and personal independence
•The doctrine of collectivism emphasizes the
primacy of the collective (e.g., a group,
party, community, class, society, or nation)
over the interests of the individual.

Political system
• Democracy: a government “of the people, by
the people, for the people.” Modern-day
democracies translate this ideology into the
principles that all citizens are politically equal,
entitled to freedom of thought, opinion,
belief, speech, and association, and command
sovereign power over public officials.
• Totalitarian system (Totalitarianism):
subordinates the interests of the individual to
that of the collective

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Political system
• Systems that emphasize collectivism tend to lean
toward totalitarianism, whereas those that place
a high value on individualism tend to be
democratic.
• However, a large gray area exists in the middle.
• It is possible to have democratic societies that
emphasize a mix of collectivism and
individualism.
• Similarly, it is possible to have totalitarian
societies that are not collectivist.

Political risk
Objective 3-2

• What is political risk? => refers to the threat that

decisions or events in a country will negatively
affect the profitability and sustainability of an
investment.
• is the risk that political decisions, events, or
conditions change a country’s business
environment of the value of their investment, or
threaten the sustainability of their operation.
• is the potential loss arising from a change in
government policy

Political risk
Objective 3-2

• Why discuss political risk?

=> No matter whether it operates in Canada,
Cambodia, Cameroon, or US, for instance, an MNE
faces the risk that the political events in the host
country will adversely affect its operational
objectives, strategic goals, and profitability.

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Political Risk Map

Objective 3-2
Map 3.1 Map of Political Risk, 2015

Source: Based on Marsh Political Risk Map 2015; and AON Political Risk, http://www.aon.com/2016politicalriskmap

Political Risk

• https://www.credendo.com/country-risk
• Short-term political risk indicators (up to 1 year):
Short-term external liabilities, foreign exchange
reserves and the current account balance
• Medium/long-term (beyond 1 year): countries’
solvency (an assessment economic and financial
situation, of the political situation and a payment
experience analysis for each country)
• country_risk_summary_table_78.xlsx

Political Risk

• www.doingbusiness.org
https://comtrade.un.org/
http://atlas.media.mit.edu
http://www.imf.org/external/country
https://data.worldbank.org/country
http://www.nationmaster.com
http://www.intracen.org/country
https://www.wto.org/english/thewto_e/countries_
e

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The State of Political Freedom

Map 3.2 Map of Freedom

Source: Freedom House, “Map of Freedom 2015,” at https://freedomhouse.org/report/freedom-world/freedom-world-2015. Used by

permission of Freedom House.

Types of Political Risk

Objective 3-2
Figure 3.4 Classes and Characteristics of Political Risk

Types of Political Risk

Based on Sources of Political Risk

• Risk relating to property ownership

• Risk relating to governmental intervention to
organization (on international business)
• Risk relating to fund transfer/project: currency
inconvertibility and transfer restriction risk
• Political Violence Risk: war, riots, terrorism

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Types of Political Risk

Based on Sources of Political Risk

• Risk relating to property ownership

– Expropriation (with low compensation, long time):
sung công
– Confiscation: tịch thu (without any compensation)
– Nationalization/Domestication:

Types of Political Risk

Based on Sources of Political Risk

• Risk relating to governmental intervention on

international trade
– Ban on the import/export
– Embargo on import
– Impose tariff/quota

Types of Political Risk

Based on Sources of Political Risk

• Risk relating to fund transfer/project

– Currency inconvertibility
– Foreign exchange control
– Regulation for fund transfer and transfer
restriction risk

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Types of Political Risk

Based on Sources of Political Risk

• Political Violence Risk:

– includes all violent act(s) undertaken with a political
objective;
– this concept is broader than ‘war’ and includes i)
‘terrorism’ (political, religious and ideological
objectives) and ii) political violence damage (damage
to material assets as a result of political violence);
– for the purposes of analysing the political violence
risk, types of business interruption as a result of
political violence damage are included.

Definition of Law
• Law may be defined as a body of rules,
created by the state, binding within its
jurisdiction and enforced with the authority of
the state through the use of sanctions

• A set of rules and procedures usually intended

to regulate some aspect of society

Legal Systems and Components

Objective 3-3

• What is the legal system?

– mechanism for conceiving, stipulating, interpreting, and
enforcing the laws in a formal jurisdiction.
– A legal system is the way the law is structured and
operated in a country
• Components of a legal system
– Constitutional Law
– Criminal Law
– Civil and Commercial Law

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Legal Systems and Components

• Constitutional Law: translates the country’s constitution
into an open and just legal system, setting the framework
for government and defining the authority and
procedure of political bodies to establish laws.
• Criminal Law: safeguards society by specifying what
conduct is criminal, and prescribing punishment to those
who breach those standards.
• Civil and Commercial Law: which ensure fairness and
efficiency in business transactions by stipulating private
rights and specific remedies in order to regulate conduct
between individuals and/or organizations.

Sources of law in Vietnam

Constitution
Legislation Acts, Codes

Delegated Ordinances
Decrees
legislation Circulars
Decisions

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Categories of Law

Law is a very large field, and it is common to

divide it into categories

• common law and civil law

• private law and public law

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Common Law and Civil Law

• Common Law and Civil Law are terms used

to describe legal systems
• A legal system is the way the law is
structured and operated in a country
– England and Vietnam have different legal
systems

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Common Law

• Common Law is used to describe legal

systems based on the English legal system
• These are usually countries which were
once part of the British Empire
– eg: America, Australia, New Zealand

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Civil Law
• Civil Law is used to describe legal systems
which are based on old Roman Law (from the
Roman Empire in what is now Italy)
• eg: France, Germany

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Common Law v. Civil Law

Below: A world map showing countries today that have a civil law system (light blue), countries that have a
common law system (green), and countries that have both (orange).

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Types of Legal Systems

Objective 3-5
Map 3.4 The Wide World of Legal Systems

Source: University of Ottawa, “World Legal Systems,” retrieved February 15, 2016, from http://www.juriglobe.ca/eng/index.php. Used
by permission.

Legal systems
• A common law system relies on tradition, judge-made
precedent, and usage. It respects established case law in
resolving disputes.
• A civil law system relies on the systematic codification of
accessible, detailed laws.
• A theocratic law system relies on religious doctrine, precepts,
and beliefs.
• A customary law system reflects the wisdom of daily
experience or, more formally, enduring spiritual legacies and
time-honored philosophical outlooks.
• A mixed legal system results when a nation uses two or more
of the preceding types.

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Two Key Legal Concerns Facing IB

Objective 3-4

• Operational
• Strategic

Two Key Legal Concerns Facing IB

Objective 3-4

•Operational concerns include:

– Process of starting a business involves activities
such as registering its name, adopting the
appropriate tax structure, obtaining licenses and
permits, arranging credit, and securing insurance.
– Making and enforcing contracts.
– Hiring and firing rules.
– Ease of closing a business or going out of business.

Two Key Legal Concerns Facing IB

Objective 3-4

• Strategic concerns include:

– Product regulation laws.
– Product safety laws.
– Legal jurisdiction.
– Intellectual property.

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Ranking of Doing Business in Various Countries

Objective 3-5
Table 3.5 Easy Here, Hard There: Doing Business In Various Countries

Source: Doing Business 2016. The World Bank. Retrieved May 15, 2016.

• https://www.doingbusiness.org/en/doingbusi
ness
• https://www.credendo.com/country-risk
• https://www.doingbusiness.org/en/data/expl
oretopics/trading-across-borders

Question:
Search and give more details about the Islamic law (especially
applying to the international business)

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-Property rights: legal rights over use to

which a resource is put and income derived

-Intellectual Property Rights (IP): patents,

copyrights, trademarks: major bone of
contention especially in info-based economies

-Product safety and liability: standards

protecting consumers

- Enforcement of national and

international laws

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