POLITICAL & LEGAL ENVIRONMENT 1.

Understand how politics affects international trade and
foreign investment. 2. Distinguish between different types of political risk. 3. Discuss how Multinational Enterprises work with political organizations and constituencies that affect their operations and performance. 4. Identify the challenges of working in countries that have differing political systems from home country. 5. Identify areas of jurisdiction with which Multinational Enterprises should be concerned. 6. Identify some key international laws and issues that affect Multinational Enterprises, like product liability, competition, and intellectual property.

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Political Environment: Burger King Israel
• A Burger King franchisee opened a restaurant in Ma’aleh
Adumim, which is a suburb of Jerusalem under Israeli control. • Unfortunately, the restaurant was placed on the wrong side of the 1967 border, so the Palestinian government revoked the license of the restaurant to operate. • Who had jurisdiction in this instance? Israel or the Palestinian Authority? • What types of political action will resolve this issue?

The Political Environment
• Politics plays an important role in international
business. • Politics, and political behavior is defined as the acquisition, development, securing, and use of power in relation to other entities; • where power is viewed as the capacity of social actors to overcome the resistance of other social actors.

The Institutional Context
• Organizations work closely with governments and
political actors in a pluralistic environment.

• Frequently, business objectives require the
cooperation of political authority and managers find themselves working with government officials and ministries to clear the way for operations.

• The ease of this work depends on the institutional
context they face in their negotiations.

The Institutional Context
• Managers sometimes work with governments that
are similar to their own. This makes the work easier, due to affinity between the company and the political actors, with common understanding of how a system works.

• Sometimes, however, managers find themselves
working with governments that are very different. This sometimes presents an animosity of systems that make the work a great deal more frustrating and difficult.

The MNE-Government Relationship
• Relationships between governments in the home
and host countries is an important issue facing Multinational Enterprises. • Governments affect the economic and legal environment. They set monetary and tax policies, price controls, and intellectual property regulations. • They also influence labor relations, trade policies, capital and exchange controls, and transfer pricing policies. Government can be a regulator, a legislator, a competitor, a customer, a distributor, and a potential partner.

The MNE-Host Government Relationship
• Political power and size have a great deal to do with
how Multinational Enterprises deal with host governments. • Models like Sovereignty at Bay, Dependency, and Neo-Mercantilism all assume a powerful MNE interacting with a less powerful developing country. • Some assume that the MNE doesn’t act in the LDC’s best interest, and will pursue institutional hegemony and control over that LDC.

The MNE-Host Government Relationship
• Perhaps the best way to describe the relationship
between MNE and host is one of Coopetition, which is a simultaneous cooperation and competition in the relationship between Multinational Enterprise and Host. • Multinational Enterprises compete with hosts in establishing policy that is favorable. • They cooperate with hosts in providing things governments want: capital, employment, revenues, and legitimacy.

The MNE-Host Objectives
• • • • •
Favorable Trade And Investment Environment Nondiscrimination Access To Markets Few Regulatory Hurdles Legitimacy

The Host-MNE Objectives
• • • • • •
Protecting Vital Interests National Security Taxation Participation Protection Of Markets And Employment Legitimacy

The MNE-Host Bargaining Power
• Host bargaining power comes from creating an
attractive environment. • Multinational Enterprise bargaining power comes from proprietary technologies or products, capital, potential tax revenue, big exports, employment, complex management requirements, or political/economic alliances.

Governments’ Investment Support
• Governments compete fiercely for investment. They
frequently provide incentives to companies seeking to invest. • These range from grants and investment allowances, to subsidies, preferential tax treatment, import duty exemptions, loans, loan guarantees, and interest subsidies. These incentives can exceed $100 Million to $ 1 Billion.

The MNE-Home Government Relationship
• The home government provides main operating
environment, helps negotiate its international affairs and incentives, and even provides its own incentives for foreign investment to targeted areas.

• The home government, in cases, can even close
the home environment to competition.

Home Government Tactics
• • • • • • • •
Political Pressure Commercial Pressure Financial Pressure Tied Aid Gifts, Favors Defense, Arms Sales Revocation Of Laws Visas

Political Risk
• Political risk is the probability of disruption of
operation from political forces or events and their correlates. • Risk comes from instability, whether that is political, economic, regulatory, policy oriented, judicial, and conflict oriented.

Lowest/Highest Political Risk
• • • • • • •
United States United Kingdom Netherlands Norway Sweden Australia New Zealand

• • • • • • •

Iran Iraq North Korea Cuba Zimbabwe Afghanistan Libya

Types of Political Risk
• Ownership Risk, representing potential threats to
ownership from nationalization or seizure.

• Operational Risk, representing threats governments
impose for “changing the rules of the game.”

• Transfer Risk, represent impediments to the transfer
of production factors, products or capital.

Managing Political Risk: Strategies
• Minimize outright investment. • Sign treaties that encourage and protect mutual • • • • • •
investment. Create settings where investment can be seized when threatened. Avoid acquisition of national icon stature firms. Utilize host country financing. Accelerate profit repatriation. Create staggered technology transfer policies. Create local sourcing arrangements. …/…

Managing Political Risk: Strategies
• Create alliances with powerful local partners. • Utilize insurance agencies that specialize in political
risk. • Build political support at home and in the host through political action, lobbying, or other proactive measure. • Continuously monitor political and economic development in order to prepare for changing political risk. • Remember that “business is international, but all politics are local.” Try to manage political relationships at the local levels.

The Legal Environment
• Common law • Civil law • Theocratic law

The Common Law System
• The Common Law System originated in the United
Kingdom, uses an independent judicial system that relies legislative action, judicial interpretation through case precedent, and application by users.

• The United Kingdom, United States, Australia, and
Canada are countries that utilize this system.

The Civil Law System
• The Civil Law system relies almost exclusively on a
legal code that is applied universally.

• Considered to be less flexible than a common law
system and requires frequent governmental intervention.

• Most of Continental Europe and Latin America uses
the Civil Law System.

The Theocratic System
• The Theocratic System uses religious codes to
create a legal system.

• Islamic countries frequently use a theocratic system
called a “shariah”. While some countries exclusively use Shariah systems, like Saudi Arabia and Iran, others use a mixture of common, civil, and religious law.

• Examples of these countries are Malaysia,
Singapore, and Indonesia.

Legal Jurisdiction and International Business
• Legal jurisdiction is the prevailing legal authority
under which a legal case can be judged. • It is frequently very difficult to determine jurisdiction in international business as MEs are subject to laws in all countries they operate within. • This is more difficult in globalization, since it is more and more difficult to determine the true origins of products. Firms often find they are subject to more than one jurisdiction.

Legal Jurisdiction: Jurisdictional Levels
• International, where a firm is subject to international
law and an international regulatory system under development. • Regional-Global, where a firm is subject to laws and regulations of regional entities and trade blocks. • National, where firms are subject to laws of nations within which they operate. • Local, where firms are also subject to local laws and ordinances.

Legal Issues in International Business
• Product Origin laws frequently determine duties and
tariffs to be paid. This is more and more difficult to determine with globalization. • Competition laws, like antitrust regulations and insider trading laws vary widely from country to country. • Marketing and Distribution laws that determine allowable practices vary widely. • Product Liability laws determine liability and allowable damages for product safety. These vary widely. …/…

Legal Issues in International Business
• Treaties determine some business practices. • Patent and Trademark Laws protect intellectual
property and rights to proprietary technologies. These also vary widely.

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