International BusinessChapter ThreeThe Political and Legal Environments Facing Business

3-*Chapter ObjectivesTo discuss the different goals and functions of political systems To profile trends in the emergence and diffusion of political systemsTo identify the idea of political risk and approaches to managing itTo understand how different political and legal systems affect the conduct of businessTo profile trends in the evolution and diffusion of legal systemsTo examine the major legal issues facing international business companiesTo profile the idea of intellectual property and the bases of concern and controversy

3-*Political System DefinedPolitical system: the complete set of institutions, political organizations, and interest groups, the relationships amongst those institutions, and the political norms and rules that govern their functions

The ultimate test of any political system is its ability to hold a society together.

3-*Fig. 3.1: Political and Legal Influences onInternational Business

3-*Ways to Assess Political SystemsIndividualistic-people accept the primacy of individual freedoms in the political, economic, and cultural realms-people believe in minimal government interventionCollectivist-people reason that the needs of society take precedence over the needs of the individual-people believe that it is the governments role to define the needs and priorities of the countryCollectivist paradigms may be either democratic (Japanese) or authoritarian (Chinese) in nature.

3-*Political Ideology DefinedPolitical ideology: the body of constructs, theories, and aims that constitute a sociopolitical program

Pluralism indicates the coexistence of a variety of ideologies within a particular society.Shared ideologies create bonds within and between countries; differing ideologies split societies apart.

3-*Types of Political Ideologies: The Two ExtremesDemocracy: widespread citizen participation in the decision-making and governance processes, either directly or through elected representatives

Totalitarianism: the monopolization of power by a single agent; opposition is neither recognized nor tolerated

In theocratic totalitarianism, religious leaders are also the political leaders; in secular totalitarianism, the government imposes order via military power.

3-*Fig. 3.2: The Political Spectrum

3-*Features of Contemporary Democratic Systemsfreedom of opinion, expression, and the pressfreedom to organizefree electionslimited terms for elected officialsan independent and fair court systema nonpolitical bureaucracy and defense infrastructurecitizen access to the decision-making process

3-*Discuss the economic difficulties faced when a country changes from a totalitarian to a democratic political system. Compare the political transition of a large country (e.g., Russia) to the transition of a smaller country (e.g., Hungary).

3-*Trends in Political SystemsTotalitarian regimes continue to fail as citizens challenge the right of the state to govern.Many who champion democracy truly believe that greater political freedom also leads to economic freedom and higher standards of living. Differentialism, i.e., the clash of civilizations, refers to the arguments that apparently innate and irreconcilable difference amongst cultures can trigger a backlash against Western ideas regarding political rights and civil liberties.

3-*Political Risk DefinedPolitical risk: the expectation, i.e., the likelihood, that the political climate in a country will change in such a way that a firms operating position or investment value will deteriorate

MNEs do their best to effectively deal with the threat of political risk through active and/or passive approaches.

3-*Types of Political Risk[ranging from the least to the most destructive]Systemic [a change in public policy]Procedural [bureaucratic delays, labor disputes, etc.]Distributive [tax and regulatory revisions]Catastrophic [random political events]

3-*Leading Sources of Political RiskExpropriation or nationalizationInternational war or civil strifeUnilateral breaches of contractDestructive governmental actionsHarmful actions against peopleRestrictions on the repatriation of profitsDiffering points of viewDiscriminatory taxation policies

3-*Identify companies, both domestic and foreign, that operate internationally. Explore the possible sources of political risk for each of those firms, given (i) the countries in which they have a presence and (ii) the basic nature of their products and operations.

3-*Legal System DefinedLegal system: the mechanism for creating, interpreting, and enforcing the laws in a specified jurisdiction

Generally, differences in the structure of law influence the attractiveness of a particular country as an investment site.

3-*Types of Legal SystemsCommon law [based on precedent]Civil law [based upon a set of laws that comprise a code]Theocratic law [based upon religious precepts]

Customary law anchors itself in the wisdom of daily experience or important traditions. A mixed legal system emerges when two or more legal systems are used within a single country.

3-*Legal Issues in International BusinessOperational concernsease of entry and exithiring and firing employeescontract enforcementStrategic concernsproduct safety and liabilitymarketplace behaviorLocal contentproduct originlegal jurisdictionarbitration[continued]

3-*Intellectual property rights [IPRs]: ownership rights to intangible assets [copyrights, patents, trademarks, etc.] Generally, less developed countries provide less protection for IPRs than do industrialized nations. Those countries with a more individualistic orientation view IPRs as intrinsically legitimate, but those with a more collectivist outlook extol the virtues of shared ownership.

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3-*Implications/ConclusionsMany countries are in a state of political transition. Presently, there is a shift away from totalitarian governments toward more democratic political ideals and freer market principles. [continued]

3-*International business is affected by laws and regulations enacted both by countries and by international organizations.Laws may be at cross-purposes; some may diminish the ability of firms to compete with foreign competitors.