Lecture 6 (Ch. 7) Political and Legal Systems

Bundoora Campus
MGT1IB
Introduction to International Business
Lecture 6: Political and Legal Systems
INNOVATIVE | RESPONSIBLE | ENGAGED

latrobe.edu.au/business
Lecture 6 - Objectives
1. Explain what is meant by country risk

2. Compare and contrast key different political, economic and legal
systems
3. Analyse the types of country risk produced by the political and legal
systems
4. Recognise the various approaches used by firms to manage country risk
What is Country Risk?
Exposure to potential loss or other adverse effects on

• Country Risk: company operations and profitability caused by
developments in a country’s political, legal and/or
economic environments.
Example
Coca-Cola’s business suffered in Germany when the government enacted a

recycling plan that required consumers to return non-reusable soft-drink cans to
stores for a refund of €0.25. Rather than coping with the unwanted returns, the big
supermarket chains responded by removing Coke from their shelves and pushing
their own store brands instead.
Country Risk
Source: International Business: The New Realities2nd Edition

By Cavusgil, Knight, Riesenberger, Rammal and Rose
Country Risk

Country Risk

Types of Political and Economic Systems
A political system is a complete set of institutions that

• Political system: define the process in which decisions concerning a
society are made. The political system defines who
makes decisions and how.
Two key contrasting political systems are totalitarianism and democracy


Contrasting Political Systems
The state attempts to regulate most aspects of public

• Totalitarianism:
and private behaviour.
• Government seeks to control not only all economic and political matters but
also the attitudes, values and beliefs of its citizenry.
• Generally, is either theocratic (religion based) or secular (non-religion based).
• Totalitarian states do not tolerate activities by individuals or groups such as
churches, labour unions or political parties that are not directed towards the
state’s goals.
Democracy means rule by the people. A democratic country has a

system of government in which the people have the power to
• Democracy: participate in decision-making.
For more on this topic check:
https://peo.gov.au/understand-our-parliament/how-parliament-works/system-of-government/democracy/#:~:tex
t=What%20is%20democracy%3F&text=A%20democratic%20country%20has%20a,policy%20proposals%20(direct
%20democracy)
.
• Government functions and interventions are limited to perform essential

functions that serve all citizens, such as national defence, maintaining law
and order, diplomatic relations and the construction and maintenance of
infrastructure such as roads, schools and public works.
• Democracies are characterized by political freedom.
• Democracies are also associated with higher economic freedom.

Political Freedom is characterised by :
• Free and fair elections.

• The right to form political parties.
• Fair electoral laws, and the existence of a parliament or other legislative
body.
• Freedom from domination by the military, foreign powers or religious
hierarchies.
• Voice and defense of minorities.
Economic Freedom is related to:
• The extent of government interference in business.

• The strictness of the regulatory environment.
• The ease with which commercial activity is carried out according to market
forces.
• Economic Freedom is closely associated with ‘openness’—a lack of

regulation or barriers to the entry of firms in foreign markets.

Contrasting Economic Systems
Private individual and business, rather than the

government, largely own and control the factors of
• Capitalism: production: capital, land and natural resources, and labour.
https://www.investopedia.com/articles/personal-finance/082415/pros-and-cons-capitalist-vs-socialist-economies.asp#
:~:text=Key%20Takeaways&text=Capitalism%20is%20based%20on%20individual,on%20private%20control%20of%
20resources
.
• Capitalism is based on Private Property Rights, which is the ability to own

property and assets and to increase one’s asset base by accumulating private
wealth.
• Capitalism relies on a free Market Economy, driven by supply and demand.
• Prices and the allocation of goods and services across the population are
largely determined by market forces.

Contrasting Economic Systems
The Government, rather than the private individuals and

business, largely own and control the factors of production:
• Socialism: capital, land and natural resources, and labour.
https://www.investopedia.com/articles/personal-finance/082415/pros-and-cons-capitalist-vs-socialist-economies.asp#
:~:text=Key%20Takeaways&text=Capitalism%20is%20based%20on%20individual,on%20private%20control%20of%
20resources
.
• Capital and wealth should be vested in the state and used primarily as a
means of production for use rather than for profit.
• Collective welfare of people is believed to outweigh the welfare of the individual.
• Government controls the basic means of production, distribution and
commercial activity.
• Prices and the allocation of goods and services across the population are largely
determined by the government.
Legal Systems
Legal systems provide a framework of rules and norms

of conduct that mandate, limit or permit specified
• Legal systems: relationships between people and organisations, and
provide punishments for those who violate these rules and
norms.
• Rule of law. The existence of a legal system in which rules are clear,
publicly disclosed, fairly enforced and widely respected by individuals,
organisations and the government.
• In the absence of the rule of law, economic activity can be impeded and
firms have to contend with great uncertainty.
Types of Legal Systems
• Common law. The basis of common law is tradition, past practices and
legal precedents set by the nation’s courts through interpretation of
statutes, legislation and past rulings.
• Also known as ‘case law’, originated in England and spread to Australia,
Canada, India, Malaysia, New Zealand, the United States and other former
members of the British Commonwealth.
• Civil law. Based on an all-inclusive system of laws that have been
‘codified’—they are clearly written and accessible; divides the legal
system into three separate codes: commercial, civil and criminal.
• Found in France, Germany, Italy, Japan, Turkey and Latin America. Its
origins go back to Roman law and the Napoleonic Code.
• Religious law. A legal system strongly influenced by religious beliefs, ethical

codes and moral values viewed as mandated by a supreme being.
• Most important religious legal systems are based on Hindu, Jewish and
Islamic law.
• Islamic law spells out norms of behaviour regarding politics, economics,
banking, contracts, marriage and many other social issues.
• Mixed systems. Two or more legal systems operating together.
• In most countries legal systems evolve over time, adopting elements of one
system or another that reflect their unique needs.

Types of Country Risk Produced By the Political

System
• Government takeover of corporate assets.
• Confiscation: Seizure of corporate assets without compensation.

• Expropriation: Asset seizure with compensation.
• Nationalisation: Seizing of an entire industry, with or without
compensation.
• More common today is so-called creeping expropriation, in which

governments modify laws and regulations after foreign MNEs have made
substantial local investments in property and plants.

System
• Governments may unilaterally resort to sanctions and embargoes to respond to

offensive activities of foreign countries.
• Sanction: Type of trade penalty imposed on one or more countries by one or

more other countries (e.g., tariffs, trade barriers, import duties).
• Example: Australia’s sanctions on Fiji in response to the military

coup of 2006.
• Embargo: An official ban on exports from or imports to a particular country, in
order to isolate it and punish its government. Generally more serious than a
sanction; used as a political punishment for some disapproved policies or
acts.
• Example: US embargo on Cuba since 1962.


System
• Boycotts against firms or nations. A voluntary refusal by consumers or

special-interest groups to engage in commercial dealings with a nation or a
company.
• War, insurrection and revolution. War, insurrection and other forms of violence
pose significant problems for business operations; indirect effects can be
disastrous.
• Terrorism. The threat or actual use of force or violence to attain a political goal
through fear, coercion or intimidation.
Types of Country Risk Produced By the Legal System
Changes to legal frameworks that relate to private economic activities may affect
business, specially when changes are unexpected and abrupt.
• Private law. Regulates relationships between persons and organisations, including

contracts, and liabilities that may arise due to negligent behaviour.
- Intellectual property. Ideas or works that are created by people or firms and
protected by patents, trademarks and copyrights.
- Foreign investment laws. Affect the type of entry strategy that firms choose,
as well as their operations and performance.
- Marketing and distribution laws. Determine which practices are allowed in

advertising, promotion and distribution.
- Income repatriation. MNEs earn profits in various countries and typically seek
ways to transfer these funds back to their home country; some governments
devise laws that restrict such transfers.
• Environmental laws. Laws to preserve natural resources, to combat pollution and the
abuse of air, earth and water resources, and to ensure health and safety .
Types of Country Risk Produced By the Legal

System
• Government controls. Governments impose laws and regulations on how

firms should conduct production, marketing and distribution activities within
their borders. Such regulations may reduce firms’ efficiency, effectiveness
or both.
Question: Is government control always negative?

Managing Country Risk
• Four specific strategies managers can employ to manage country risk:
• Proactive environmental scanning. Allows firm to improve practices in

ways that conform with the goals and standards of local laws and political
entities, and to create a positive environment for business success.
• Strict adherence to ethical standards. Ethical behaviour is essential not
only for its own sake, but also because it helps to insulate the firm from some
country risks that other firms otherwise encounter.
Managing Country Risk
• Alliances with qualified local partners. Qualified local partners are better
informed about local conditions and better situated to establish stable
relations with the local government.
• Protection through legal contracts. A legal contract spells out the rights
and obligations of each party, and is especially important when relationships
go wrong.
• Conciliation—formal process of negotiation with the objective of resolving
differences in a friendly manner.
• Arbitration—a neutral third party hears both sides of a case and decides
in favour of one party or the other, based on an objective assessment of
the facts.
• Litigation—occurs when one party files a lawsuit against another in order
to achieve desired ends.
PLEASE PREPARE ALL

WORKSHOP ACTIVITIES
AND COME TO YOUR
TUTORIAL READY TO
PARTICIPATE

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Bundoora Campus

Introduction to International Business

Lecture 6: Political and Legal Systems

INNOVATIVE | RESPONSIBLE | ENGAGED

1. Explain what is meant by country risk

What is Country Risk?

Exposure to potential loss or other adverse effects on

Coca-Cola’s business suffered in Germany when the government enacted a

Source: International Business: The New Realities2nd Edition

Source: International Business: The New Realities2nd Edition

Source: International Business: The New Realities2nd Edition

Types of Political and Economic Systems

A political system is a complete set of institutions that

Two key contrasting political systems are totalitarianism and democracy

Types of Political and Economic Systems

The state attempts to regulate most aspects of public

Types of Political and Economic Systems

Democracy means rule by the people. A democratic country has a

• Government functions and interventions are limited to perform essential

• Democracies are characterized by political freedom.

• Democracies are also associated with higher economic freedom.

Types of Political and Economic Systems

Political Freedom is characterised by :

• Free and fair elections.

Types of Political and Economic Systems

Economic Freedom is related to:

• The extent of government interference in business.

• Economic Freedom is closely associated with ‘openness’—a lack of

Types of Political and Economic Systems

Private individual and business, rather than the

• Capitalism is based on Private Property Rights, which is the ability to own

Types of Political and Economic Systems

The Government, rather than the private individuals and

Legal systems provide a framework of rules and norms

Types of Legal Systems

Types of Legal Systems

• Religious law. A legal system strongly influenced by religious beliefs, ethical

Types of Legal Systems

Source: International Business: The New Realities2nd Edition

Types of Country Risk Produced By the Political

• Government takeover of corporate assets.

• Confiscation: Seizure of corporate assets without compensation.

• More common today is so-called creeping expropriation, in which

Types of Country Risk Produced By the Political

• Governments may unilaterally resort to sanctions and embargoes to respond to

• Sanction: Type of trade penalty imposed on one or more countries by one or

• Example: Australia’s sanctions on Fiji in response to the military

• Example: US embargo on Cuba since 1962.

Types of Country Risk Produced By the Political

• Boycotts against firms or nations. A voluntary refusal by consumers or

Types of Country Risk Produced By the Legal System

• Private law. Regulates relationships between persons and organisations, including

- Marketing and distribution laws. Determine which practices are allowed in

Types of Country Risk Produced By the Legal

• Government controls. Governments impose laws and regulations on how

Question: Is government control always negative?

Managing Country Risk

• Four specific strategies managers can employ to manage country risk:

• Proactive environmental scanning. Allows firm to improve practices in

Managing Country Risk

PLEASE PREPARE ALL

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