The legal system of a country is of immense importance to international business. A country’s laws regulate business practice, define the manner in which business transactions are to be executed, and set down the rights and obligations of those involved in business transactions. Like the economic system of a country, the legal system is influenced by the prevailing political system (although it is also strongly influenced by historical tradition). The government of a country defines the legal framework within which firms do business—and often the laws that regulate business reflect the rulers’ dominant political ideology.
Because common law tends to be relatively ill specified, contracts drafted under a common law framework tend to be very detailed with all contingencies spelled out. In civil law systems, however, contracts tend to be much shorter and less specific because many of the issues typically covered in a common law contract are already covered in a civil code. Thus, it is more expensive to draw up contracts in a common law jurisdiction, and resolving contract disputes can be a very adversarial process in common law systems. But, common law systems have the advantage of greater flexibility and allow for judges to interpret a contract dispute in light of the prevailing situation. International businesses need to be sensitive to these differences; approaching a contract dispute in a state with a civil law system as if it had a common law system may backfire (and vice versa).
Along the same lines, in 1997 trade and finance ministers from the member states of the Organization for Economic Cooperation and Development (OECD), an association of the world’s 30 most powerful economies, adopted the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions. The convention obliges member states to make the bribery of foreign public officials a criminal offense.
Corruption has been well documented in every society, from the banks of the Congo River to the palace of the Dutch royal family, from Japanese politicians to Brazilian bankers, and from Indonesian government officials to the New York City Police Department. According to Transparency International, an independent nonprofit organization dedicated to exposing and fighting corruption, world wide businesses and individuals spend some $400 billion a year on bribes related to government procurement contracts alone.
Ownership rights over intellectual property are established through patents, copyrights, and trademarks. A patent grants the inventor of a new product or process exclusive rights for a defined period to the manufacture, use, or sale of that invention. Copyrights are the exclusive legal rights of authors, composers, playwrights, artists, and publishers to publish and disperse their work as they see fit. Trademarks are designs and names, often officially registered, by which merchants or manufacturers designate and differentiate their products
Benefits In the most general sense, the long-run monetary benefits of doing business in a country are a function of the size of the market, the present wealth (purchasing power) of consumers in that market, and the likely future wealth of consumers. International businesses need to be aware of this distinction, but they also need to keep in mind the likely future prospects of a country. In 1960 South Korea was viewed as just another impoverished Third World nation. By 2003 it was the world’s 11th largest economy, measured in terms of GDP. By identifying and investing early in a potential future economic star, international firms may build brand loyalty and gain experience in that country’s business practices. In contrast, late entrants may find that they lack the brand loyalty and experience necessary to achieve a significant presence in the market. In the language of business strategy, early entrants into potential future economic stars may be able to reap substantial first-mover advantages, while late entrants may fall victim to late-mover disadvantages. ( First-mover advantages are the advantages that accrue to early entrants into a market. Late-mover disadvantages are the handicap that late entrants might suffer from.) Costs A number of political, economic, and legal factors determine the costs of doing business in a country. With regard to political factors, the costs of doing business in a country can be increased by a need to pay off the politically powerful to be allowed by the government to do business. With regard to economic factors, one of the most important variables is the sophistication of a country’s economy. It may be more costly to do business in relatively primitive or undeveloped economies because of the lack of infrastructure and supporting businesses.As for legal factors, it can be more costly to do business in a country where local laws and regulations set strict standards with regard to product safety, safety in the workplace, environmental pollution, and the like (since adhering to such regulations is costly). Also, local laws that fail to adequately protect intellectual property can lead to the “theft” of an international business’s intellectual property, and lost income. Risks As with costs, the risks of doing business in a country are determined by a number of political, economic, and legal factors. Political risk has been defined as the likelihood that political forces will cause drastic changes in a country’s business environment that adversely affect the profit and other goals of a business enterprise. Social unrest can result in abrupt changes in government and government policy or, in some cases, in protracted civil strife. On the economic front, economic risks arise from economic mismanagement by the government of a country. Economic risks can be defined as the likelihood that economic mismanagement will cause drastic changes in a country’s business environment that hurt the profit and other goals of a particular business enterprise. When legal safeguards are weak, firms are more likely to break contracts and/or steal intellectual property if they perceive it as being in their interests to do so. Thus, legal risks might be defined as the likelihood that a trading partner will opportunistically break a contract or expropriate property rights. Overall Attractiveness The overall attractiveness of a country as a potential market and/or investment site for an international business depends on balancing the benefits, costs, and risks associated with doing business in that country.
The Political and Legal Environments Facing Business 3-1
Political System Political system includes the structures, processes, and activities by which a nation governs itself. Political systems can be assessed according to two dimensions • Degree to which they emphasize collectivism as opposed to individualism • Degree to which they are democratic or totalitarian
Political Participation Who participates in them And What extend they participateWide participation occurs when people capable ofinfluencing the political system make an effort to do soNarrow participation occurs when few peopleparticipate
Political IdeologiesTotalitarianism 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 cancontrolled to preserve order preserve personal liberties - No individual liberties
Political Ideologies Most modern societies are pluralistic politically • Arise due to differences in languages, ethnic background, tribal groups or religions
The Political Spectrum Aut h orit aria n e ativ erv ns Co Fascist Democratic NondemocraticDemocracy Totalitarianism Government Government Lib era ist l un mm Co
Indicators of Political Rights Degree to which fair and competitive elections occur Ability of voters to endow representatives with real power Ability to organize political parties Existence of safeguards on the rights of minorities 3-4
Indicators of Civil Liberties Existence of freedom of the press Equality under the law for all individuals Extent of personal social freedoms Degree of freedom from extreme governmental indifference or corruption 3-6
Comparative Measures of Freedom POLITICAL RIGHTS Not Free Partly Free Free CIVIL LIBERTIES 3-7
Democracy Freedom of opinion, expression, press and organization Elections Limited terms for elected officials Independent court system • High regard for individual rights • Respect for property Nonpolitical bureaucracy and defense infrastructure Accessibility to the decision-making process 3-8
Totalitarianism Typically theocratic or secular Opposite end of the political spectrum from democracy Order is often imposed through military power Single party, group, or individual monopolizes political power Lack of constitutional guarantees Neither recognizes nor permits opposition Fascism Authoritarianism (tribal, right-wing) Communism/ socialism 3-9
States in Transition The political of the world has changed radically since the late 1980’s A wave of democratic revolutions swept the world
Political Risks for International Business Political Risk—caused by political instability • Promotes fear that operating position will deteriorate • Tends to be higher in totalitarian regimes Sources of political risks • Unstable Political System • Political involvement of religious or military leader • Frequent changes in government • Corrupt or poor leadership • Civil disorder due to: Economic conditions Human rights violations Conflict among races, religions & etnics Group animosity 3-11
Can cause: • Procurement difficulties • Work stoppages • Shipment delays • Property damage Types of political risk • Micro—political actions are aimed at specific foreign investments • Eg; Pakistan, France • Macro—political actions affect a broad spectrum of foreign investors • Eg; Cuba
Types of Political Risk Conflict & ViolenceLocal Content Terrorism &requirements Kidnapping Political Risks Policy Property Changes Seizure
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 Kidnapping and other terrorist activities are means of making political statements. Kidnapping and the taking of hostages may be used to fund a terrorist group’s activities. Executives of large international companies are prime targets.
Terrorism and KidnappingSecurity checklist for managers on business abroad: Fly non-stop 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 behavior Give friendly but cautious answers to personal questions Know local emergency procedures before trouble strikes
Confiscation The forced transfer of assets Property Seizure from a company to the government without compensation Expropriation NationalizationThe forced transfer of assets When expropriation involv from a company to the one or a small number o government with companies in an industry compensation the government may tak over an entire industry
Policies and LawsPolicy changes restrict:• Foreign ownership• Investment levels• Business activities
Local Content Requirements Laws stipulating that a specified amount of a good or service be supplied by producers in the domestic market. These requirements can force companies to use locally available raw materials, procure parts from local suppliers, or employ a minimum number of local workers.
Managing Political Risk AvoidanceInfluencing Local Risks Adaptation Politics Information Gathering
Managing Political Risk Local equity / debt LocalizationAdaptationAdaptation Incorporate risk intoIncorporate risk into Development assistance business strategiesbusiness strategies Partnerships Insurance
Managing Political Risk Current employees with relevant information Information gatheringInformation gathering Gather data to better Gather data to better predict and manage risk predict and manage risk Agencies specializing in political-risk services
Managing Political Risk Lobbying Influencing local lawmakers Influence local politicsInfluence local politics Present firm’s views Present firm’s views on political matters on political matters Corruption Foreign Corrupt Practices Act
Legal Systems Rules - laws - that regulate behavior • Processes through which laws are enforced & grievances are redressed Three main types of legal systems – in use around the world: • Common law • Civil law • Theocratic law
Kinds of Legal Systems Common law—based on tradition, precedent, custom, and usage • Interpretation by the courts • US and UK Civil law—codified legal system • Based on a detailed set of laws that make up a code • Rules for business transaction included • Based on how the law is applied to the facts • Germany France, Japan Theocratic law—based on religious precepts • e.g., Islamic law – has remained frozen – moral rather than commercial law – intended to govern all aspects of life – Sudan and Pakistan
Contract Law Contract law is the body of law that enforces a contract • Specifies conditions under which an exchange is to occur • Details rights and obligations of parties Dispute resolution is often complex • Where to arbitrate and whose laws apply? • Validity of contracts and decisions Role of United Nations Convention on Contracts for the International Sale of Goods (CIGS)
Foreign Corrupt Practices Act The act was passed during the 1970s following revelations that U.S. companies had bribed government officials in foreign countries in an attempt to win lucrative contracts This law makes it illegal to bribe a foreign government official in order to obtain or maintain business The act allows facilitating or expediting payments to secure the performance of a routine governmental action
Corruption as of 2004 Figure 2.1: Rankings of Corruption by Country 2004 Finland New Zeland United Kingdom United States France Malaysia Italy Brazil China India Russia Zimbabw e Indonesia Nigeria Bangladesh 0 2 4 6 8 10 Corruption Index (10=clean; 0=totally corrupt)
Intellectual Property Rights Intellectual property refers to property that is the product of intellectual activity Intellectual property laws are a very important stimulus to innovation and creative work Protection of intellectual property rights differs greatly from country to country
Piracy of Intellectual Property Figure 2.2: Regional Piracy Rates for Software Eastern Europe Asia Pacific Latin America Middle East and Africa Western Europe North America 0 20 40 60 80 Percentage of Software that is Pirated
Product Safety and Liability Product safety laws set safety standards for products and manufacturing processes Product liability laws hold the firm and its officers responsible for product safety standards Criminal laws/ civil liability laws • Civil laws call for payment and monetary damages • Criminal liability laws result in fines or imprisonment
Other Legal Issues for International Businesses Worker relations • Health and safety standards • Workweek Employment practices Antitrust prohibitions Environmental practices Patents, trademarks, and intellectual property protection Taxes and reporting requirements 3-15
Political Strategies for International Businesses Identify the exact issue • Trade barrier? • Environmental standards? • Workers rights, etc? Define/determine the political aspect of the issue Assess the potential political action of other companies Identify important institutions and individuals Formulate strategies • Key objectives • Alternatives • Probable effectiveness 3-13
Attractiveness Figure 2.1: Country Attractiveness Costs Benefits Corruption Size of Economy Lack of InfrastructureLikely Economic Growth Legal Costs Overall Attractiveness Risks Political Risks: Social Unrest/Anti-Business Trends Economic Risks: Economic Mismanagement Legal Risks: Failure to Safeguard Property Rights
Ethical BehaviorPersonal behavior in accordance with rules or standards for right conduct or morality Enron Ethical absolutism Import ethics Tyco from home WorldcomParmalat (Italy) Ethical relativism When in Rome, do as the Romans
Social ResponsibilityGo beyond legal obligations to balance commitments toinvestors, customers, communities and other companies Respect consumers’ rights Guard workers’ rights Protect the environment Preserve employment Encourage development Improve health Support education
International Relations Favorable internationalpolitical relations foster: Stable business environments Improved business communications Efficient distribution systems Prompt and equitable dispute resolution Expanded opportunities Diminished risk levels