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  1. 1. The Political and Legal Environments Facing Business 3-1
  2. 2. 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
  3. 3. 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
  4. 4. 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
  5. 5. Political Ideologies Most modern societies are pluralistic politically • Arise due to differences in languages, ethnic background, tribal groups or religions
  6. 6. 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
  7. 7. 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
  8. 8. 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
  9. 9. Comparative Measures of Freedom POLITICAL RIGHTS Not Free Partly Free Free CIVIL LIBERTIES 3-7
  10. 10. 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
  11. 11. 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
  12. 12. States in Transition The political of the world has changed radically since the late 1980’s A wave of democratic revolutions swept the world
  13. 13. The Spread of Democracy
  14. 14. 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
  15. 15.  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
  16. 16. Types of Political Risk Conflict & ViolenceLocal Content Terrorism &requirements Kidnapping Political Risks Policy Property Changes Seizure
  17. 17. 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
  18. 18. 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.
  19. 19. 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
  20. 20. 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
  21. 21. Policies and LawsPolicy changes restrict:• Foreign ownership• Investment levels• Business activities
  22. 22. 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.
  23. 23. Managing Political Risk AvoidanceInfluencing Local Risks Adaptation Politics Information Gathering
  24. 24. Managing Political Risk Local equity / debt LocalizationAdaptationAdaptation Incorporate risk intoIncorporate risk into Development assistance business strategiesbusiness strategies Partnerships Insurance
  25. 25. 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
  26. 26. 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
  27. 27. 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
  28. 28. 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
  29. 29. 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)
  30. 30. 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
  31. 31. 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)
  32. 32. 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
  33. 33. 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
  34. 34. 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
  35. 35. 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
  36. 36. 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
  37. 37. 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
  38. 38. 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
  39. 39. 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
  40. 40. 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