Politics, Law, and

Business Ethics
Dr. W.A. Owusu-Ansah
Room TF 02, AYIM Building
Complex
woansah@gmail.com
wk 4
 Learning Objectives

• Describe each main type of political system

• Identify the origins of political risk and how managers
can reduce its effects
• Describe each main type of legal system and important
global legal issues
• Explain ethics and social responsibility and key issues
facing international companies
• Explain how international relations affect international
business activities
 Introduction
Why is Western news reporting on Russia so
negative?
Does Russia really have a democracy?
Does it matter?
Is democracy the best political system to
develop Russia’s economy?
Does Russia have the rule of law?
If your firm is considering investing in
emerging economies, should it consider
Russia
 ANSWERS??
Boil down to institutions, popularly known as
the “rules of the game.”
As economic players, firms play by these
rules.
However, institutions are not static, and they
may change, resulting in institutional
transitions—“fundamental and comprehensive
changes introduced to the formal and informal
rules of the game that affect firms as players.”
 ANSWER ll
Russia’s institutional transitions from a
communist totalitarian state to a market
economy with regular elections (never mind the
imperfections) are certainly extraordinary.
Overall, the success and failure of firms around
the globe are, to a large extent, determined by
firms’ ability to understand and take advantage
of the different rules of the game.
IOW, how firms play the game and win (or lose),
at least in part, depends on how the rules are
made, enforced, and changed
 TAKE HOME !!!

This calls for firms to

constantly monitor,
decode, and adapt to the
changing rules of the game
in order to survive and
prosper.
 Political Ideologies

Totalitarianism Pluralism Anarchism

Both private and public

groups need to balance
each other’s power
Every aspect of Only individuals and
people’s lives must be private groups can
controlled to preserve order preserve personal liberties
 Totalitarianism

 Leaders govern without people’s support

 Government controls much of people’s lives
 Leaders do not tolerate opposing viewpoints

Lack of
Imposed Restricted
constitutional
authority participation
guarantees
 Forms of Totalitarianism

Theocratic totalitarianism (totalitarian religious

leadership) monopolization of political power in the
hands of one religious party or group
Secular totalitarianism
(military and bureaucratic leadership)

Communist totalitarianism

Tribal totalitarianism :one tribe or ethnic group

monopolizing power
Right-wing totalitarianism: intense hatred against
communism
Democracy

Government leaders are elected

by the wide participation of the
people or their representatives

 Freedom of expression
 Periodic elections
 Full civil and property rights
 Minority rights
 Non-political bureaucracies
Types of Political Risk

Conflict and violence

Terrorism and kidnapping
Property seizure
Policy changes
Local content requirements
 Conflict and Violence

Arises from: Reduces ability to:

 People’s resentment  Obtain materials
toward government and equipment
 Territorial disputes  Manufacture and
between nations distribute products
 Ethnic, racial, or  Protect employees’ lives
religious disputes and firm’s assets
 Terrorism and Kidnapping

Security checklist for managers on business abroad:

 Fly nonstop when possible and avoid unsecured
areas of airports
 During your stay, vary your routines and means
of transportation
 Keep a low profile and refrain from loud, flashy
behaviour
 Give friendly but cautious answers to personal
questions
 Know local emergency procedures before trouble
strikes
 Property Seizure

Confiscation
Forced transfer of assets from
a company to the government
without compensation

Expropriation
Forced transfer of assets from
a company to the government
Nationalization
with compensation
Forced asset transfer to the
government of an entire
industry
 Policies and Laws

Policy changes Local content

restrict: requirements:

Foreign
Foreignownership
ownership Specify the portion
of a good or service
Investment
Investmentlevels
levels to be supplied
by local firms
Business
Businessactivities
activities
 Managing Political Risk I

Partnerships

Adaptation Localization
Adaptation
Incorporaterisk
Incorporate riskinto
into
businessstrategies
business strategies
Development assistance

Insurance
 Managing Political Risk II

Current employees
with relevant information
Information gathering
Information gathering
Gatherdata
Gather datato
tobetter
better
predictand
predict andmanage
manageriskrisk

Agencies specializing
in political-risk services
 Managing Political Risk III

Lobbying
Influencing local lawmakers
Influence local
Influence local politics
politics
Presentfirm’s
Present firm’sviews
views
onpolitical
on politicalmatters
matters
Corruption
e.g. Foreign Corrupt Practices
Act
 World’s Legal Systems
A legal system refers to the formal rules of
the game on how a country’s laws are
enacted and enforced.
By specifying the do’s and don’ts, a legal
system reduces transaction costs by
minimizing uncertainty and combating
opportunism.
Laws in different countries typically are not
enacted from scratch, but are often
transplanted—voluntarily or otherwise—from
three legal traditions
World’s Legal Systems

Common Law (Roman;

France the oldest, most influential)
Tradition, precedent, and usage

Civil Law (English origin)

Codified rules and statutes

Theocratic Law
Religious teachings form law
(e.g. Jewish law and Islamic law)
Three Legal Traditions
Implication for IB
In Saudi Arabia, McDonald’s operates “ladies only”
restaurants to be in compliance with the Koran’s ban on
direct, face-to-face contact between men and women (who
often wear a veil) in public.
Also in Saudi Arabia, banks have to maintain two retail
branches: One for male customers manned by men and
another for female customers staffed by women.
NB: This requirement obviously increases the property,
overhead, and personnel costs.
To reduce costs, some foreign banks, such as HSBC, staff
their back office operations with both male and female
employees who work side by side
 Property Rights

Regardless of which legal family a country’s legal

system belongs to, one of the most fundamental
economic functions that a legal system serves is
to protect property rights
> the legal rights to use an economic property
(resource) and to derive income and other benefits
from it. E.gs homes, offices, and factories.
In Africa, only approximately 1% of land is formally
registered; in developed economies, every parcel
of land, every building, and every trademark is
represented in a property document
 Global Legal Issues I
Intellectual property
- Result of intellectual talent and abilities
- Piracy/counterfeits a serious problem

 Patent
Excludes all but the inventor from making, using,
or selling the invention (WTO = 20 years)

 Trademark
Words or symbols that distinguish a product and
its manufacturer ("Coca-Cola")

 Copyright
Freedom of creator to publish or dispose of original
works as they choose ("Happy Birthday to You")
 Global Legal Issues II

 Standardization
- Interpreting and applying laws uniformly
 Product safety and liability
- Responsibility for damage, injury, or death
 Taxation
- Income, sales, consumption and VAT
 Antitrust (antimonopoly) laws
- Prevent market sharing, price fixing, and
unfair advantage
CLASS DISCUSSION ON ETHICS:
As manager, you discover that your firm’s
products are counterfeited by small family
firms that employ child labor in rural
Bangladesh.
You are aware of the corporate plan to
phase out the products soon. You also
realize that once you report to the
authorities, these firms will be shut down,
employees will be out of work, and
families and children will be
starving. How do you proceed?
 Philosophies of Ethics
and Social Responsibility
ETHICS
Personal behaviour in accordance with rules or
standards for right conduct or morality
Friedman View Cultural Relativism
“Greed is Good” and profits When in Rome, do as
are the only real goal of the Romans do
business.
Utilitarianism
Righteous Moralism
Produce the greatest
Home country standards
good for the greatest
of ethics should be followed
number.
 Corporate Social Responsibility

Go beyond legal obligations to balance commitments to

investors, customers, communities, and other companies

 Fight to eliminate bribery and corruption

 Improve labour conditions and guard
human rights
 Practice fair trade to help the
disadvantaged
 Protect the environment and conserve
resources
 International Relations
Favourable international
political relations foster:
 Stable business
environments

 Improved business
communications

 Efficient distribution
systems

 Prompt and equitable

dispute resolution

 Expanded opportunities
 Diminished risk levels
 Lesson Review

• Describe each main type of political system

• Identify the origins of political risk and how managers
can reduce its effects
• Describe each main type of legal system and important
global legal issues
• Explain ethics and social responsibility and key issues
facing international companies
• Explain how international relations affect international
business activities
Politics, Law, and
Business Ethics