The Political and Legal Environments Facing Business.pdf

The Political and Legal
Environments Facing Business

Political and Legal Factors Inﬂuencing
International Business Operations

The Political Environment
The Political Environment
•
•
•
The political environment in international business
consists of a set of political factors and government
activities in a foreign market that can either facilitate
or hinder a business’ ability to conduct business
activities in the foreign market.
political risk
There is often a high degree of uncertainty when
conducting business in a foreign country, and this risk
is often referred to as political risk or sovereign risk.
Managers study political and legal environments in
order to adjust company activities to local
circumstances.
Political system is a coordinated set of principles, laws,
ideas, and procedures relating to a particular form of
government.
government.
government.
government.
government.

Case:
China - Complicated Risks, Big
Opportunities

Individualism vs. Collectivism
Individualism vs. Collectivism




Individualism
Predominance of the rights and role of the individual
Predominance of the rights and role of the individual.
Countries with an individualistic orientation (Australia,
Canada, Netherlands, New Zealand, the United States,
and the United Kingdom) shape their marketplace with
the idea of laissez-faire which holds that the
government should not interfere in business affairs;
rather, the market should operate according to the
neoliberal principles of free market fundamentalism.
Collectivism
Predominance of the rights and role of the collective
Predominance of the rights and role of the collective.
Countries with collectivist orientation (Argentina, China,
Vietnam, Japan, South Korea, Egypt, Brazil, Taiwan, and
Mexico) hold that government regulates the market to
promote social equality, labor rights, income equality,
and workplace democracy so that the “welfare of the
nation takes precedence over the selﬁshness of the

Political Ideology
Political Ideology
•
•
–
The orientation toward individualism or
collectivism fundamentally shapes a nation’s
political system and, hence, its political
ideology.
Political ideology is a set of beliefs that
explains and justiﬁes a preferred economic
and governmental order for society.
Most modern societies are
pluralistic
Most modern societies are
pluralistic
Pluralism denotes a diversity of views or
stands rather than a single approach or
method. Most modern societies are
pluralistic.

…The Political Spectrum
…The Political Spectrum
•
•
–
–
–
–
A Political Spectrum outlines the various forms
of political ideology.
Political freedom is the ability of a nation’s
citizens to participate freely in the political
process.
Political freedom measures
Political freedom measures
elections
elections
the degree to which fair and competitive
elections occur
freedoms
freedoms
the extent to which individual and group
freedoms are guaranteed
rule of law
the legitimacy ascribed to the general rule of law
press
the freedom of the press

The Political Spectrum
The Political Spectrum

Democracy
Democracy
•
•
•
–
–
–
Democracy is a system of government where
the citizens exercise power by voting.
Power of the people Rule of the majority
Power of the people Rule of the majority
“Power of the people” or “Rule of the majority”
is commonly referred to as democracy.
Abraham Lincoln
of the people, by the people,
for the people
Abraham Lincoln
for the people
Abraham Lincoln
for the people
According to Abraham Lincoln, democracy is
a government “of the people, by the people,
for the people”
In a democracy – (from the ancient Greeks)
all citizens are politically and legally equal.
all are equally entitled to freedom of
thought, opinion, belief, speech, and
association.
all equally command sovereign power over

…Democracy
…Democracy
•
•
•
•
Prominent types of democracy include:
indirect democracy
USA, UK, and
France
indirect democracy
USA, UK, and
France
indirect democracy
USA, UK, and
France
Representative (also called indirect democracy): A form
of government in which the people elect oﬃcials to
create laws and policy on their behalf. Nearly 60% of the
world’s countries employ a form of government based
on representative democracy, including USA, UK, and
France.
Canada, Germany, and Italy
Canada, Germany, and Italy
Multiparty: A political system whereby three or more
parties govern, either separately or as part of a coalition.
The leadership of a single party cannot legislate policy
without negotiating with opposition parties. Example:
Canada, Germany, and Italy.
India and Australia
Parliamentary: A party (or a coalition of parties) with
the greatest representation in the parliament forms the
government, its leader becoming prime minister or
chancellor. Example: India and Australia.
Social: A political movement advocating a gradual and
peaceful transition from capitalism to socialism.

Totalitarianism
Totalitarianism
•
•
Totalitarianism is a form of government that
theoretically permits no individual freedom and that
seeks to subordinate all aspects of individual life to
the authority of the state.
political and ﬁnancial matters
attitudes, morals, and beliefs of the
people
people
people
Totalitarianism is a form of government in which
the state’s power is unlimited and is used to control
virtually all aspects of public and private life. This
control extends to all political and ﬁnancial matters,
as well as the attitudes, morals, and beliefs of the
people.
ruled by a dictator
very little or no freedom
no free speech or
ruled by a dictator
no free speech or
ruled by a dictator
no free speech or
ruled by a dictator
no free speech or
ruled by a dictator
no free speech or
ruled by a dictator
no free speech or
A totalitarian society is usually ruled by a dictator,
and there is very little or no freedom. In
totalitarianism, the government controls almost
every aspect of life. There is no free speech or

…Totalitarianism
…Totalitarianism
•
•
•
•
Prominent types of totalitarianism include:
Kazakhstan, North Korea, and Turkmenistan
Kazakhstan, North Korea, and Turkmenistan
Authoritarianism: A form of government characterized by
strong central power and limited political freedoms. Oﬃcials
regulate the political environment but pay less attention to
the economic and social structure of society. Example:
Kazakhstan, North Korea, and Turkmenistan.
Fascism: A single-party state that controls, through force and
indoctrination, people’s minds, souls, and daily existence.
Adolf Hitler in Germany, Benito Mussolini in Italy, Francisco
Franco in Spain and Juan Perón in Argentina were well-known
fascist leaders.
China, Vietnam, and Venezuela
Secular: An idea pertaining to secularity, whereby a state is
oﬃcially neutral in matters of religion, supporting neither
religion nor irreligion. A single-party government controls
elections, tolerates disagreement as long as it does not
challenge the state, and suppresses other ideologies.
Example: China, Vietnam, and Venezuela.
Iran,
Iran,
Theocratic: A form of government in which God or a deity of
some type is recognized as the supreme ruling authority,
giving divine guidance to human intermediaries that manage
the day to day affairs of the government. Example: Iran,

Political Ideology and MNEs’
Actions
Actions
Actions

Political Risk
Political Risk
•
1.
2.
3.
4.
systemic, procedural, distributive, and catastrophic.
Political risk refers to the risk that political decisions, events, or
conditions will affect a country’s business environment in ways that may
adversely affect the profitability or sustainability of an investment. The
common types of political risks, from least to most disruptive, are as
follows: systemic, procedural, distributive, and catastrophic.
Risks initiated from substantial changes in the business
policies of the host government
new government establishment, shifts
in the strategic views on the economic sector, or even personnel
changes among top government officials
Systemic: Risks initiated from substantial changes in the business
policies of the host government. The possible reasons for the policies
changes might be related to the new government establishment, shifts
changes among top government officials, responsible for the country
economic course. It impacts all firms operating within environment.
Procedural risk reflects the potential cost and its deviation
to perform the whole range of operational activities in the host country
Government and authorities’
corruption, unsettled labor disputes, high level of bureaucracy,
ineffective business decision-making, preferential treatment for certain
businesses
businesses
businesses
businesses
businesses
businesses
Procedural: Procedural risk reflects the potential cost and its deviation
to perform the whole range of operational activities in the host country,
including smooth movements of the final products, raw materials,
finances, human resources, and any other components essential for
successful business operations. Government and authorities’
businesses might lead to the low business efficiency and transaction
costs increase.
Host country’s revision of tax codes, regulatory structures,
and monetary policy to capture greater benefits from foreign
companies, decrease the return on invested capital
Distributive: Host country’s revision of tax codes, regulatory structures,
companies, decrease the return on invested capital.
risks arise from unanticipated political
changes
changes
changes
changes
Catastrophic: These types of risks arise from unanticipated political
changes that largely affect all business operations in the country, but
can be especially dangerous for local operations of the foreign

The Legal Environment
The Legal Environment
•
•
•
–
–
–
Legal systems differ across countries due to variations in
tradition, precedent, usage, custom, or religious guidelines.
The legal system specifies the rules that regulate behavior,
the processes by which laws are enforced, and the procedures
used to resolve grievances.
The legal system is the mechanism for creating, interpreting,
and enforcing the laws in a specified jurisdiction.
Modern legal systems evidence three components:
constitution
Constitutional Law: It translates the country’s constitution
into an open and just legal system, setting the framework
for government and defining the authority and procedure
of political bodies to establish laws.
specifying what
conduct is criminal, and prescribing punishment
specifying what
conduct is criminal, and prescribing punishment
Criminal Law: It safeguards society by specifying what
conduct is criminal, and prescribing punishment to those
who breach those standards.
fairness and efficiency
in business transactions
fairness and efficiency
in business transactions
Civil and Commercial Law: It ensure fairness and efficiency
in business transactions by stipulating private rights and
specific remedies in order to regulate conduct between
individuals and/or organizations.

Types of Legal Systems
Types of Legal Systems
1.
2.
3.
4.
5.
Managers face five types of legal systems in the world today:
tradition and
developed by judges
tradition and
developed by judges
Common Law: A common law system relies on tradition and
developed by judges through the decisions of courts. There
is not always a written constitution or codified laws.
Codified laws
collected, restated, and written down
Codified laws
collected, restated, and written down
Civil Law: The civil law system is a codified system of law
(Codified laws refer to the rules and regulations that have
been collected, restated, and written down for the purpose of
providing civil order to a society).
religious
doctrine, precepts, and beliefs
religious
doctrine, precepts, and beliefs
Theocratic Law: A theocratic law system relies on religious
doctrine, precepts, and beliefs. Ultimate legal authority is
vested in religious leaders, who regulate business
transactions and social relations based on their
interpretation of a holy text.
Customary Law: Customary law is based on norms of
behavior that gain legitimacy through long-term practice.
Mixed: It refers to legal systems where two or more of the
above legal systems work together.

Legal Issues in
Legal Issues in
International Business
International Business
1.
2.
3.
4.
1.
2.
3.
4.
Operational Concerns:
Starting a business
Making and enforcing contracts
Hiring and ﬁring local workers
Closing down the business
Strategic Concerns:
Country of origin and local content
Product safety and liability
Legal jurisdiction
Intellectual property

The Political and Legal Environments Facing Business.pdf

The Political and Legal Environments Facing Business.pdf

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