This chapter discusses the political and legal environment factors that are important for international businesses to consider. It covers different types of political systems, such as democracies, monarchies, and theocracies. It also examines international legal systems like common law, civil law, and socialist law. The chapter outlines various risks international businesses face, such as political, economic and commercial risks. It introduces tools for measuring country risk, including the BERI Index, EIU risk indices, and other indexes. Finally, it discusses methods for managing risks, such as employing locals, sharing ownership, and using insurance guarantees.

1. 1
International Business
Rakesh Mohan Joshi
Professor & Chairperson, IIFT New Delhi
Copyright @ Oxford University Press
International Business
R. M. Joshi
Chapter 8: Political and Legal
Environment

2. Chapter 8
POLITICAL AND
LEGAL ENVIRONMENT
Copyright @ Oxford University Press
International Business
R. M. Joshi
Chapter 8: Political and Legal
Environment

3. LEARNING OBJECTIVES

To explain the significance of the political and
legal environment in international business


To discuss various forms of political systems
To explicate different types of legal systems

To elaborate principles of international law

To elucidate risks in international business

To explain methods of measuring and
managing risks
Copyright @ Oxford University Press
International Business
R. M. Joshi
Chapter 8: Political and Legal
Environment

4. Significance of understanding
International Political & Legal Environment
An
international
countries
having
firm
needs
diverse
to
operate
political
and
in
legal
frameworks that, at times, conflict with its home
country.
Value
judgments
made
from
the
perspective of the home country considerably
hinders objective decision-making in the diverse
international scenario. Therefore, a thorough
conceptual understanding of political and legal
environments
affecting
international
business
operations is needed.
Copyright @ Oxford University Press
International Business
R. M. Joshi
Chapter 8: Political and Legal
Environment

5. INTERNATIONAL POLITICAL ENVIRONMENT
The political environment of the country of
operation becomes increasingly important for an
internationalizing firm as it moves from exports
to foreign direct investment (FDI). Cordial
political relations between the firm’s home
country and the host countries have a direct
favourable impact on its foreign operations. As a
firm expands internationally and begins to
operate in multiple countries, the political and
legal issues become increasingly complex.
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International Business
R. M. Joshi
Chapter 8: Political and Legal
Environment

6. Political System
It comprise of various stakeholders, such as
the government, political parties with
different ideologies, labour unions, religious
organizations, environmental activists, and
various NGOs.
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International Business
R. M. Joshi
Chapter 8: Political and Legal
Environment

7. Political Ideology
A set of ideas or beliefs that people hold
about
their
political
regime
and
its
institutions about their position and role in
it.
Copyright @ Oxford University Press
International Business
R. M. Joshi
Chapter 8: Political and Legal
Environment

8. Types of government: economic
systems
Communism: Form of government based on the
concept of a classless society where all the major factors of
production are owned by the government and shared by all
the people rather than profit-seeking enterprises, for the
benefit of the society.
Socialism: A form of government where basic and
heavy industries are operated by the government so as to
ensure social welfare objectives wherein small businesses
may be privately owned.
Capitalism:
An economic system which provides
complete freedom of private ownership of productive
resources and industries.
Copyright @ Oxford University Press
International Business
R. M. Joshi
Chapter 8: Political and Legal
Environment

9. Types of government: political
systems
Democracy: Government by the people
where citizens are directly involved in decision
making.
Totalitarianism:
Dictatorial
form
of
centralized government, usually in the hands
of a dictator who regulates every aspect of
the state. Various forms of totalitarianism
include:
• Secular totalitarianism
• Fascist totalitarianism
• Authoritarian totalitarianism
• Communist totalitarianism
• Theocratic totalitarianism
Copyright @ Oxford University Press
International Business
R. M. Joshi
Chapter 8: Political and Legal
Environment

10. Types of government: structure


Parliamentary: The government consults
its citizens from time to time and the
parliament has power to formulate and
execute laws.
Commonwealth Countries: Countries
representing
constitutional
monarchies
which recognize Queen Elizabeth II as head
of
the
sate
over
an
independent
government.
Copyright @ Oxford University Press
International Business
R. M. Joshi
Chapter 8: Political and Legal
Environment

11. •Monarchies:
heads
of
Countries that have monarchs as the
government.
There
may
be
either
constitutional or absolute monarchies.
•Theocracy: The rule of god where the civil leader is
believed to have a direct personal connection with god.
Copyright @ Oxford University Press
International Business
R. M. Joshi
Chapter 8: Political and Legal
Environment

12. Trade
Embargos:
completely
with
a
Prohibiting
country
so
trade
as
to
economically isolate it and apply political
pressure on its government.
Trade
Sanctions:
Imposing
selective
coercive measures to restrict trade from a
country .
Copyright @ Oxford University Press
International Business
R. M. Joshi
Chapter 8: Political and Legal
Environment

13. Bureaucracy:
Form
of
administration
based on hierarchical structure governed by
a set of written rules and established
procedures.
describe
The term is often used to
inefficient
and
obstructive
administrative process and red-tapism.
Terrorism: Systematic use of violence to
create
fear
in
general
public
with
an
objective to achieve a political goal or
convey a political message.
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International Business
R. M. Joshi
Chapter 8: Political and Legal
Environment

14. INTERNATIONAL LEGAL ENVIRONMENT
Firms
operating
internationally
face
major
challenges in conforming to different laws,
regulations, and legal systems in different
countries.
International
mangers
need
to
understand the types of legal systems followed
in the countries of their operations before
entering into legal contracts.
Copyright @ Oxford University Press
International Business
R. M. Joshi
Chapter 8: Political and Legal
Environment

15. Judicial Independence and
Efficiency
A fair judicial system also reduces
political risks in overseas markets. The
level
of
efficiency
judicial
differs
independence
widely
and
among
countries.
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International Business
R. M. Joshi
Chapter 8: Political and Legal
Environment

16. International Legal Systems
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International Business
R. M. Joshi
Chapter 8: Political and Legal
Environment

17. Common Law: Law based on traditions, past
practices, and legal precedents set by the courts
through
interpretation
of
statutes,
legal
legislations, and past rulings. It depends less on
written statutes and codes.
Common law originated from England and it is
followed in most of the former British colonies,
such as India, United Kingdom, the United
States, Canada, Australia, and New Zealand.
Copyright @ Oxford University Press
International Business
R. M. Joshi
Chapter 8: Political and Legal
Environment

18. Civil
Law:
Law
based
on
a
comprehensive set of written statutes. It
is derived from the Roman law and is
followed in most of continental Europe,
Japan, and Latin America.
Copyright @ Oxford University Press
International Business
R. M. Joshi
Chapter 8: Political and Legal
Environment

19. Socialistic
Law:
Socialist
law
traditionally
advocates ownership of most property by the
state
or
state-owned
public
enterprises,
prohibiting free entry to foreign firms.
This law is derived from the Marxist socialist
system
and
continues
to
influence
legal
framework in former communist countries, such
as the CIS, China, North Korea, Vietnam, and
Cuba.
Copyright @ Oxford University Press
International Business
R. M. Joshi
Chapter 8: Political and Legal
Environment

20. Theocratic Law: The legal system based
on
religious
doctrine,
precepts,
and
beliefs. For instance, the Hebrew law and
the Islamic law are derived from religious
doctrines
and
their
scholarly
interpretations.
Copyright @ Oxford University Press
International Business
R. M. Joshi
Chapter 8: Political and Legal
Environment

21. Principles of International Law
International
law
is
less
coherent
compared to domestic law since it
embodies a multiplicity of treaties and
conventions
besides
the
laws
of
individual countries.
Copyright @ Oxford University Press
International Business
R. M. Joshi
Chapter 8: Political and Legal
Environment

22. Principles of International Law

Principle of Sovereignty

International Jurisdiction
• Nationality Principle
• Territoriality Principle
• Protective Principle

Doctrine of Comity

Act of State Doctrine

Treatment and Right of Aliens

Forum for Hearing and Setting Disputes
Copyright @ Oxford University Press
International Business
R. M. Joshi
Chapter 8: Political and Legal
Environment

23. United Nations Commission on
International Trade Law (UNCITRAL)
Established in 1966, UNCITRAL aims to
reduce and harmonize and unify the laws
of international trade.
Copyright @ Oxford University Press
International Business
R. M. Joshi
Chapter 8: Political and Legal
Environment

24. RISKS IN INTERNATIONAL BUSINESS
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International Business
R. M. Joshi
Chapter 8: Political and Legal
Environment

25. Commercial Risks:
Risks such as non-acceptance of
goods, non-payment or insolvency
of the importer.
Copyright @ Oxford University Press
International Business
R. M. Joshi
Chapter 8: Political and Legal
Environment

26. Economic Risks:
Restrictions imposed on business activities on the
grounds of national security, conserving human
and
natural
resources,
scarcity
of
foreign
exchange, to curb unfair trade practices and to
provide protection to domestic industries.
Copyright @ Oxford University Press
International Business
R. M. Joshi
Chapter 8: Political and Legal
Environment

27. Political Risks:
Possibility
of
political
decisions,
events, or conditions in an overseas
market or country that
adversely
affect the international business that
include confiscation, expropriation,
nationalisation, and domestication.
Copyright @ Oxford University Press
International Business
R. M. Joshi
Chapter 8: Political and Legal
Environment

28. BERI Index
It provides risk forecasts for about 50
countries throughout the world and a
broad assessment of the country’s
business climate on 15 economic,
political, and financial factors on a
scale from zero to four.
Copyright @ Oxford University Press
International Business
R. M. Joshi
Chapter 8: Political and Legal
Environment

29. EIU’s Risk Indices
It monitors operational risks for 150 countries on
a scale of 0 to 100. The overall score includes an
aggregate of ten categories of risks, such as
security,
political
effectiveness,
legal
stability,
and
government
regulatory,
macro-
economic, foreign trade and payments, financial,
tax policy, labour markets, and infrastructure.
Copyright @ Oxford University Press
International Business
R. M. Joshi
Chapter 8: Political and Legal
Environment

30. Global Political Risk Index (GPRI)
GPRI is a comparative index to monitor
political risks in 24 emerging markets,
including India, China, Brazil, Russia, and
South Africa. It serves as an ‘early
warning’ system to anticipate critical
trends and provides a measure for the
country’s capacity to withstand political,
economic, security-related,
and social
shocks.
Copyright @ Oxford University Press
International Business
R. M. Joshi
Chapter 8: Political and Legal
Environment

31. Failed States Index
The Failed States Index is a useful tool to carry
out the cross-country comparison of the world’s
weakest states.
It uses 12 social, economic,
political, and military indicators and ranks on a
scale of 0–120 to assess about 177 states in
order of their vulnerability to violent internal
conflict and societal deterioration.
Copyright @ Oxford University Press
International Business
R. M. Joshi
Chapter 8: Political and Legal
Environment

32. Managing Risks in International
Business

Strategic Management of Political Risks
• Employing locals
• Sharing ownership
• Increasing perceived economic benefits to the
host country
• Follow political neutrality
• Assuring social responsibility
• Adapting to local environment

Insurance and Guarantees
• Export Credit Guarantee Corporation
• MIGA’s guarantees against non-commercial
(political) risks
Copyright @ Oxford University Press
International Business
R. M. Joshi
Chapter 8: Political and Legal
Environment