Political and Legal

Environment
Prepared by: Ms. Ismaela M. Bawica
 Intended Learning
Outcomes
Students should be able to meet the following intended learning outcomes:

1. Describe the functions of a political system;

2. Discuss between three political ideologies and how
each of them influences government policy decisions on
investments;
3. Define political risks and how companies formulate and
implement political strategies to overcome such risks; and
4. Compare three types of legal systems in international
business.
 Effects of Political
System
 A political system integrates parts of a
society into viable and functioning
units.
 The main challenge for a political
system is to unite a society of various
races and cultural backgrounds as
well as encourage cooperation.
 EFFECTS OF POLITICAL IDEOLOGY
DIFFERENCES

A political ideology, which forms part of a

political system, is a body of theories or
ideas and its purpose is to achieve socio-
political goals.
(a) The radical view, based on
Marxism, adopts a hostile stance
towards FDI.
(b) The free market view sees MNC's
as an important tool for efficient
allocation of resources and production
(c) Pragmatic nationalism is the most
practical approach whereby a host
government views FDI as having both
benefits and costs.
 POLITICAL RISKS
Political risk is defined as disruptions to an MNCÊ 's
operations due to changes in political environments.
Politics that affect international trade and foreign
investment can stem from political changes in the home
country, host country or the rest of the world.
 MICRO AND MACRO
POLITICAL RISKS
If a political action is focused on a certain foreign investment, for
example a particular foreign company, business or industry it is
called micro political risks. Companies that face micro political
risks are those with obvious position due to their size, monopoly
influences and brand icon. In 2007, Venezuelan President Hugo
Chavez’s sudden takeover of 60 oil fields belonging to foreign
companies had an impact on the oil industry. If political actions
affect a wide spectrum of foreign investors, such as when
political actions of a host country affect all foreign operations,
these are termed macro political risks. For example, the
terrorism disaster of 11 September 2001 affected both the
American and global economies.
MANAGING POLITICAL
RISK
Although political risks declined
in the 1990s, recent changes in
the political environment
witnessed a rise in political risks
after the terrorist attacks of 11
September 2001.
(a) Opt for collaboration such
as joint venture with a local
partner to gain local acceptance
for a foreign investors
presence, product and brand.
(b) Use local materials in
production to support
local industries products
or even market the local
products.
 (c) Hire local
workers and
managers.
(d) Build political support at
home and in host countries
through lobbying, public
relations and implementation
of corporate social
responsibility.
(e) Reduce exposure
by utilizing host
country financing.
(f) Avoid high-visibility
acquisitions or mergers
especially of firms or
assets viewed as local
icons.
g) Constant monitoring
of political
development.
(h) Minimize outright
investment, use leasing
or collaborate projects
with host governments.
(i) Use risk management
measures to insure and
protect properties and
intellectual property.
 MULTINATIONAL CORPORATION
GOVERNMENT RELATIONSHIP
One of the main political challenges faced
by MNCs is managing their relationship
with governments in host and home
countries. The various roles of
governments in an economy include the
following:
(a) Economic Role – through
economic policies, for example,
tax, monetary, price controls
and employment (this has been
discussed in Topic 2).
(b) Legal Role – through laws
and legislations, for example,
environmental, trade and
investment policies (this will be
discussed further in subtopic
4.7).
(c) Political Role – through
government intervention in the
business environment. The
degree of government
intervention depends on two
ideology paradigms (refer to
Figure 4.4).
(a) Foreign
ownership rules to
be relaxed.
(b) Easier entry
and access to local
markets.
(c) Removal of tariff and
non-tariff barriers to locate,
manufacture, sell products
and expand business to gain
maximum profits.
(d) Government
investment support such
as investment grants and
allowances.
 LEGAL ENVIRONMENT
The legal environment of a country is
closely related to its political system. The
legal system forms part of the external
environment dimension which influences
businesses.
TYPES OF LEGAL SYSTEMS

A legal system is different in

terms of its institutional
context. There are three legal
systems practiced by countries
as depicted in Figure 4.5.
 COMMON LAW
Common law is based on ttradition,
precedent and custom. The ccourt plays
an important role in interpreting
common law. For example, common law
is administered in the courts of the
United Kingdom and the United States.
 THEOCRATIC LAW
is based on religious tenets and
beliefs such as those practised in
Iran and the Vatican City. The most
common example is Islamic law
(Shariah) which is based on the
following:
(a) Al-Quran;
(b) Sunnah from
the Prophet; and
(c) Writings of Muslim
scholars based on the
principles found in the Al-
Quran and Sunnah.
 LEGAL ISSUES IN
INTERNATIONAL BUSINESS
Laws and regulations that affect
trade and business are important
and relevant to MNCs.
(a) Product safety and
consumer protection
such as product liability
laws;
(b) Competition
laws such as
antitrust laws; and
(c) Intellectual property
laws such as patent laws.
Let us now have a look at
the key legal issues in
detail.
 PRODUCT LIABILITY
issues are a major concern and
challenge for MNCs. Different
legal systems provide different
protection for consumers.
 COMPETITION LAWS
such as legislations on antitrust and
takeovers prevent unfair
competition in the market. Antitrust
enforcement is stringent in the
United States, European Union (EU)
and Japan.
 INTELLECTUAL
PROPERTY
refers to creations of the mind:
inventions, literary and artistic works,
and symbols, names, images, and designs
used in commerce. MNCs often face the
problem of intellectual property theft
and increasing difficulty in protecting
their IP in their FDI.
Legal issues are more complex in
the context of international
business than in domestic
business; hence, MNCs must
study, adapt and leverage national
and international differences in
product liability, competition,
intellectual property laws as well
as labor, marketing and
Thanks!
Any questions?
Clarifications?