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International Business

Chapter Three
The Political and Legal
Environments Facing
Chapter Objectives
• To discuss the different goals and functions of
political systems
• To profile trends in the emergence and diffusion
of political systems
• To identify the idea of political risk and
approaches to managing it
• To understand how different political and legal
systems affect the conduct of business
• To profile trends in the evolution and diffusion of
legal systems
• To examine the major legal issues facing
international business companies
• To profile the idea of intellectual property and the
bases of concern and controversy
Political System Defined

Political system: the complete set of

institutions, political organizations, and
interest groups, the relationships amongst
those institutions, and the political norms and
rules that govern their functions

The ultimate test of any political system is its

ability to hold a society together.

Fig. 3.1: Political and Legal
Influences on
International Business

Ways to Assess Political
• Individualistic
-people accept the primacy of individual freedoms
in the political, economic, and cultural realms
-people believe in minimal government intervention

• Collectivist
-people reason that the needs of society take
precedence over the needs of the individual
-people believe that it is the government’s role
to define the needs and priorities of the country
Collectivist paradigms may be either democratic (Japanese)
or authoritarian (Chinese) in nature.

Political Ideology Defined

Political ideology: the body of constructs,

theories, and aims that constitute a
sociopolitical program
• Pluralism indicates the coexistence of a variety of
ideologies within a particular society.
• Shared ideologies create bonds within and between
countries; differing ideologies split societies apart.

Types of Political Ideologies:
The Two Extremes
• Democracy: widespread citizen participation in the
decision-making and governance processes, either
directly or through elected representatives
• Totalitarianism: the monopolization of power by a
single agent; opposition is neither recognized nor

In theocratic totalitarianism, religious leaders are also

the political leaders; in secular totalitarianism, the
government imposes order via military power.

Fig. 3.2: The Political

Features of Contemporary
Democratic Systems
• freedom of opinion, expression,
and the press
• freedom to organize
• free elections
• limited terms for elected officials
• an independent and fair court system
• a nonpolitical bureaucracy
and defense infrastructure
• citizen access to the decision-making
Fig. 3.3: Comparative
of Freedom

Map 3.2: Global Trends in
Freedom: Political Freedom

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

Political Risk Defined

Political risk: the expectation, i.e., the

likelihood, that the political climate in
a country will change in such a way
that a firm’s operating position or
investment value will deteriorate

MNEs do their best to effectively deal with

the threat of political risk through active
and/or passive approaches.

Types of Political Risk
[ranging from the least to the most

• Systemic [a change in public policy]

• Procedural [bureaucratic delays, labor
disputes, etc.]
• Distributive [tax and regulatory revisions]
• Catastrophic [random political events]

Leading Sources of Political
• Expropriation or nationalization
• International war or civil strife
• Unilateral breaches of contract
• Destructive governmental actions
• Harmful actions against people
• Restrictions on the repatriation of profits
• Differing points of view
• Discriminatory taxation policies
Legal System Defined

Legal system: the mechanism for creating,

interpreting, and enforcing the laws in a
specified jurisdiction

Generally, differences in the structure

of law influence the attractiveness of
a particular country as an investment site.

Types of Legal Systems

• Common law [based on precedent]

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

Map 3.3: Legal Systems
in the World Today

Fig. 3.4: The Diffusion of Civil
A Selective Profile

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

• Intellectual property rights [IPRs]:
ownership rights to intangible assets
[copyrights, patents, trademarks, etc.]

Generally, less developed countries provide less

protection for IPRs than do industrialized nations.
Those countries with a more individualistic
orientation view IPRs as intrinsically legitimate,
but those with a more collectivist outlook extol
the virtues of shared ownership.


• Many countries are in a state of political

transition. Presently, there is a shift away
from totalitarian governments toward more
democratic political ideals and freer market

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