Chapter 3 International Business MBA Student

1. John D. Daniels. Lee H. Radebaugh. Daniel P.
Sulivan

2. Presented by: Don Ace Tajon

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

4. Introduction:
This chapter carries analysis forward, emphasizing that once a
company leaves it home country, it operates in markets with
different political and legal systems. Certainly, some countries are
similar like Australian companies will not find many surprises in
New Zealand. In other cases,the differences are profound ( an
unprepared U.S. Company will encounter shocks in Russia.
Navigating among countries requires MNE’s study how their political
and legal circumstances overlap and differ. Determining where,
when, and how to adjust business practices without undermining
the basis for success in an enduring challenge.
Consequently, effective managers begin with the realization
that when it comes politics and laws, countries different ideas result
in different political and legal environment. They position
themselves to compete by understanding these differences, rather
than ignoring or worse resisting them. No matter the degree of
difference, the prevailing politics and laws in any country influence
MNE’s. Throughout this chapter, we will discuss how they reflect the
prevailing political ideology shape the role of government, moderate
the degree of political risk and pose legal complexities.

5. The Political Environment
 Every country has its own political and
legal environment
 Companies must determine where,
when, and how to adjust their business
practices without undermining the
basis for success

6. The Political Environment
 Managers evaluate, monitor, and forecast
political environments
 A country’s political system refers to the
structural dimensions and power dynamics of
its government that specify institutions,
organizations, and interest groups, and
define the norms that govern political
activities

7. It comprise of various stakeholders, such as the
government, political parties with different
ideologies, labour unions, religious organizations,
environmental activists, and various NGOs.
Political System

8. Interpretations of the Political System
Individualism vs. Collectivism
INDIVIDUALISM COLLECTIVISM
- Refers to the primacy o the rights and
role of the individual
- Refers to the primacy of the rights and
role of the group.
- The primacy of individual freedom, self
expression and personal independence
- Stresses the supremacy of human
interdependence within the context of th
community
- Each persons has the right to make
economic decisions free of rules and
regulations
- Business decisions made by the group.
-Laissez – faire Countries: Argentina, China, Vietnam,
Japan, South Korea, Egypt, Brazil, Taiwan
& Mexico.
- Countries: Australia, Canada,
Netherlands, U.S., & U.K.,

9. Political Ideology:
- Is an integrated vision that defines a holistic conception of an
abstract ideal and its normative thought processes.
- A set of ideas or beliefs that people hold about their political regime
and its institutions about their position and role in it.
- Encapsulates the doctrine of political behavior and change. It
outlines the procedures for converting ideas into actions.
. Pluralism – holds that there are multiple opinions about
an issue, each of which contains part of the truth, but none
that contain the entire truth.
- two or more groups in a country differ in terms of language..
different groups champion competing political ideologies
 Democrats vs. Republicans in the United
States
 Democratic Party vs. Liberal Party in Japan

10. Political Ideology
. Pluralism – holds that there are multiple opinions
about an issue, each of which contains part of the
truth, but none that contain the entire truth.
- two or more groups in a country differ in
terms of language (Belgium), class structure(U.K.),
ethnic background (South Africa), tribal legacy
(Afghanistan), or religion(India)

11. Spectrum Analysis
 A political spectrum outlines the various
forms of political ideology
 Political freedom measures
 the degree to which fair and competitive
elections occur
 the extent to which individual and group
freedoms are guaranteed
 the legitimacy ascribed to the general rule of law
 the freedom of the press

12. Spectrum Analysis
The Political Spectrum

13. Democracy vs.
Totalitarianism

14. Democracy
- Is a government of the people by the people and for
the people according to Abraham Lincoln.
- In Modern Day democracies translate this ideology
into the principles that all citizens are politically and
legally equal.; all are equally entitled to freedom of
thought, opinion, belief, speech, and association and
all equally command sovereign power over public
officials.
- Democracy and individualism are intrinsically related
and mutually reinforcing; democracy legitimates
standards of individualism and individualism
supports principles of democarcy.

15. DEMOCRACY
Advantage:
Majority rule
Power of voting
Prevents monopoly of authority
Protect interest of the citizen
Disadvantage:
May involve immoral practice during election
Misuse of public funds
Take longer time to take decision.

16. Prominent Types of Democracy
1. Representative – originates in a constitution that protects
individual freedoms and liberties. The law treats all citizens,
both public and private equally. Ex U.S. and Japan.
2. Multiparty – political system whereby three or more parties
govern, whether separately or as part of a coalition. The
leadership of a single party cannot legislate a policy without
the negotiating with the proposition countries. Ex Canada,
Germany, Italy, and Israel.
3. Parliamentary – Citizens exercise political power by electing
representatives to a legislative branch called a parliament.
The legislature is the source of legitimacy for the various
ministers that run the executive branch. Ex. India and
Australia.
4. Social – Applies democratic means to power the transition
from capitalism to socialism. Government regulates
capitalism to control its tendency toward injustice. Ex.
Norway & Sweden.

17. TOTALITARIANISM
- Consolidates power in single agent who then
controls the politicl, economic, and social activities.
- Totalitarianism and collectivism re intinsically related
and mutually reinforcing.
- Legitimates standards of collectivism and
collectivism supports principles of totalitarianism.

18. Prominent Types of Totalitarianism
1. Authoritarianism – tolerates no deviation from state ideology.
Day to day life reflects obedience to state authority;
resistance incurs punishment. To rule people. Ex.
Kazakhstan, Chad, and Turkmenistan.
2. Fascism – organizes a nation based on corporatist
perspectives, values, and systems. Advocates a single party
state that controls, through force and indoctrination, people’s
minds, souls and daily existence. Ex. North Korea and
Burma.
3. Secular – Single party government controls elections,
tolerates dissent as long as it does not challenge the state
and suppresses ideologies. The state does not prescribe an
all encompassing ideology. It grants individual freedoms
provided one does not contest state authority or disrupt
social harmony. Ex. China, Vietnam, and Venezuela.
4. Theocratic – government is an expression of the preferred
deity. Leaders claim to represent its interest on earth. EX.
Iran, Afghanistan and Saudi Arabia.

19. TOTALITARIANISM
Advantage:
- Faster process for the system
- Law making process simpler.
- Less room for corruption.
Disadvantage:
- No individual freedom
- No political freedom
- Single person in power
- Traditional and social institution suppressed

20. The Standard of Freedom
1. Free Country – exhibits open political competition,
respects for civil liberties, independent civic life and
independent media. Ex. Australia, Brazil, India and
the United States.
2. Partly Free Country – exhibits limited political
rights and civil liberties, corruption, weak rule of
law, ethnic and religious strife, unfair elections and
censorship. Often, democracy is a convenient
slogan for the single political party that dominates
within a façade of regulated pluralism. Ex.
Guatamela, Pakistan & Tanzania.
3. Not Free Country – has few to no political rights
and civil liberties. Ex. China, Russia, Saudi Arabia
and Vietnam.

22. Trends in Political Ideologies :
Third Wave of Democratization
 Third Wave of Democratization
 number of democracies doubled in two decades
 Engines of Democracy
1. The failure of totalitarian regimes to deliver
economic progress
2. Improved communications technology
3. Economic dividends of increasing political freedom

23. Democracy:
Recession and Retreat
 Democracy’s retreat
 just 26 of the world’s democracies are full democracies
 Engines of totalitarianism
 Economic development
 Inconsistencies
 Economics problems
 Standards of democracy

24. Democracy:
Recession and Retreat
Freedom in the World: Number of Electoral
Democracies

25. Democracy:
Recession and Retreat
Freedom in the World: Gains and Declines

26. Political Ideology and the MNE
What will the political map look
like in the future?
 The Washington Consensus
 The Beijing Consensus
 The Clash of Civilisations

27. Clash of Civilisations

28. Political Risk
- refers to the risk that a host country will
make political decisions that will prove to
have adverse effects on the multinational's
profits and/or goals.

29. Types of Political Risk
1. Macro Risk – affect all companies in a given
country such as expropriation or insurrection.
* Expropriation - is the act of a government in
taking privately owned property, ostensibly to be
used for purposes designed to benefit the overall
public.
2. Micro Risk - refers to adverse actions that will only
affect a certain industrial sector or business, such
as corruption and prejudicial actions against
companies from foreign countries

30. Classifications of Political Risk
1. Systemic Political Risk
A. Financial Anomalies – Regulatory policies that make it
difficult fot the company to get credit or arrange
overseas loans.
B. Competing Perspectives – the host government
interpretations of issues such as human rights or
environmentally sustainability, creates problems for a
foreign company in its home market.
C. Unilateral Breach of contract – the host government
repudiates a contract negotiated with a foreign company
or approves a local firms doing the same.

31. Classifications of Political Risk
2. Procedural Political Risk
A. Tax Descrimination – foreign company is saddled with
a higher tax burden than a local competitor.
B. Restriction on Profit Repatriation – the host
government arbitrarily limits the amount of profit that a
foreign company can remit from its local operations.

32. Classifications of Political Risk
3. Distributive Political Risk
A. Destructive Government Actions – imposing
unilateral trade barriers (say in the form of revised
local content requirements) lets the host government
interferes with the distribution of products to local
consumers.
B. Harmful Action Against People – Local employees
of a foreign company are threatened by kidnapping,
extortion or terrorist actions.

33. Classifications of Political Risk
4. Catastrophic Political Risk
A. Expropriation/Nationalization – the host
government or a political faction seizes a company’s
local assets. Compensation, if any, is usually trivial.
Resurgent totalitarianism and resource nationalism
increase the risk.
B. Civil Strife, Insurrection, War – Military action
damages or destroys a company’s local assets.

34.  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 (ENGLAND)
 MIGA’s guarantees against non-commercial (political) risks
 MIGA is a member of the World Bank Group. To promote
foreign direct investment (FDI) into developing
countries to help support economic growth, reduce
poverty, and improve people's lives.
Managing Risks in International
Business

35. Cont. Insurance and Guarantees
- COFACE – Companies Francoise d’ Assurances
Pour le commerce Exterieure) provide up to 95%
againts political risk arising out of wars and
nationalization & BFCE ( Banque Franchisee due
Commerce Exterior) France
- Export – Import Bank (EXIM Bank) USA
- Hermes Kredit Versicherungs Aktiongesellschaft –
Germany.
- Ministry of International Trade and industry (MTTI)
Japan
- Institute Nazionale delle Assicurazioni Italy

37. Introduction:
Businesspeople champion consistency in laws from
country to country. Uniform, transparent laws make it
easier to plan where to invest and once there, how to
compete on competencies not connections. In theory
legitimate rules that apply without prejudice to
individual or institutional behavior, regardless of
political, cultural, or economic status, anchor legal
environments. In reality, just as political ideologies
differ among countries so do legal system. A key
aspects of the business environment is how a
country develops, interprets and enforces its laws.

38. Legal System
- Specifies the rules that regulate behavior, the
process by which laws are enforced and the
procedures used to resolve grievances. Legal
system differ across countries due to variations in
traditions, precedent, usage, custom, or religious
precepts.
- Ceteris Paribus , a legal system aims to institute
rules that support business formation , regulate
transactions, and stabilize relationship.
- Ceteris paribus - English translations of the phrase include "all
other things being equal" or "other things held constant" or
"all else unchanged"

39. Three Components of Modern
Legal System
1. Constitutional Law – that translate the country’s
constitution into an open and just legal system,
setting the framework for the system of
government, and defining the authority and
procedure of political bodies.
2. Criminal Law – safeguards society by specifying
what conduct is criminal and prescibing
punishment to those who breach these standards.
3. Civil and commercial laws – ensure fairness and
efficiency in business transactions. It speaks to
private rights and remedies in regulating relations
and conduct between individuals and/or
organizations.

40. 5 Types of Legal System
1. Common Law – relies on tradition, judge-made
precedent, and usage. Common law courts base their
decisions on prior judicial pronouncements rather than
on legislative codes. The common law system has
Anglo American legacies, it prevails in among others,
Canada, the United States, India, Hong Kong, England,
New Zealand, and Australia.
2. Civil law – based on statutory laws; relies on systematic
codification of accessible, detailed laws. It assigns
political officials, not government employed judges, the
responsibility to translate to legal principles into
compendium of statues. Civil law is the most
widespread type of legal system in the world , applied
in the various forms in approximately 150 countries
such as Germany, France, Mexico and Japan.

41. cont..
3. Theocratic Law/Muslim 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 the sacred text.
Prevails in the Middle East and Northern Africa.
4. Customary Law – system reflects the wisdom of
daily experience or more elegantly, spiritual legacies
and philosophical traditions.

42. Cont..
5. Mixed System – emerges when a natio uses two or
more of the preceding types. These nations are
found in Africa and Asia. For example Nigeria has
mixed legal system comprising common, theocratic
and customary law

44. Two Basis of Rule in a given country
1. Rule of man – holds that the ruler, in whatever form
commands authority that is not bound by law.
Anchors the legal system in the totalitarian states.
2. The Rule of Law – holds that no individual is above
laws that are clearly specified, commonly
understood and fairly enforced.

45. Trends In Legal System

46. Operational Concerns
 Operational issues
 Starting a business
 Entering and enforcing contracts
 Hiring and firing local workers
 Closing down the business
 In general
 rich countries regulate less
 poor countries regulate more

47. Strategic Concerns
 Country of origin and local content
 Marketplace behavior
 Product safety and liability
 Legal jurisdiction
 Intellectual property

48. Intellectual Property:
Rights and Protection
 Intellectual property refers to creative ideas,
expertise, or intangible insights that grant its owner a
competitive advantage
 Intellectual property rights refer to the right to control
and derive the benefits from writing, inventions,
processes, and identifiers
 no “global” patent, trademark or copyright exists

49. Intellectual Property:
Rights and Protection
 Attitudes towards intellectual property
 Legal legacies
 rule of man versus rule of law
 Wealth, poverty, and protection
 levels of economic development
 Cultural orientation
 individualism versus collectivism

50. References:
 Daniels, J.D., Radebaugh, L.H. and Sullivan,
D.P. (2012) International Business:
Environments and Operations. 14th edition,
Pearson