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International Business

International Business. Chapter Three The Political and Legal Environments Facing Business. Political System Defined.

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International Business

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  1. International Business Chapter Three The Political and Legal Environments Facing Business

  2. Political System Defined • Political 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. • It can be based on individualism or collectivism. • Political ideology:the ideas that expresses the goals, theories, and aims of a political party/forum or a sociopolitical program • Why should we study the political system of a nation state/country? What are the implications in business?

  3. Democracy vs. Totalitarianism • Democracy: is a government “of the people, by the people and for the people.” Citizen participation in the decision-making and governance processes, either directly or through elected representatives is ensured. Examples: USA, UK, India, European nations. • Totalitarianism: the monopolization of power by a single agent; opposition is neither recognized nor tolerated. Examples: Communist/Socialist countries, military dictatorship, kingdoms.

  4. Modern History of Democracy • Before World War I • After World War II • A decline in colonial empires • Rise of democratic nation states • Cold War • Fall of Berlin Wall, 1989-democratic governments/institutions are on the rise • 1990-2012 • Democracy in Latin America, Asia, Africa • Arab Spring • Is democracy universal-Western vs. Eastern Models

  5. Fundamental Features of a Democratic Political Systems • Freedom of opinion, expression, press, religion, association, and access to information • Citizen power and access to the decision-making process • Citizen equality before law • Free, fair and regular elections • Majority rule with minority protection • Independent and fair court system • Fair legal system: Rule of Law prevails

  6. Freedom House: Comparative Measures of Freedom

  7. Political Risk Political risk:the expectation, i.e., the likelihood, that the political climate in a country will change in such a way that a firm’s operating position or investment value will deteriorate. Four types of political risks are: • Systemic: a change in public policy that affect everyone • Procedural: bureaucratic delays, labor disputes, etc. • Distributive: tax and regulatory risk in respective industries • Catastrophic: random political events

  8. Managing Political Risks • Be a good corporate citizen (example: participate in development projects, literacy etc.) • Expand power bases through business relationships (example: joint venture, licensing, political payoffs etc.) • Study government attitude and participate government incentive programs • Maintain good relationship with political allies, other embassies in the country

  9. Legal System • Legal system: the mechanism for creating, interpreting, and enforcing the laws in a specified jurisdiction • Types of legal systems: • Common law [based on precedent, traditions] • Civil law [based upon a set of laws that comprise a code] • Theocratic law [based upon religious precepts] • Mixed systems are possible • Implications of various types of legal system for business

  10. Implications for Business • Operational concerns • Starting and closing a business • Contract enforcement • Hiring and firing employees • Day to day operations • Strategic concerns • Country of origin issue • Marketplace behavior-nature of competition • Product safety and liability • Legal jurisdiction • Intellectual Property Rights • World Bank’s Ease of Doing Business

  11. Chapter 3: Discussion Questions • Define political system and explain why a business manager should study the political system of a country. • How does democracy differ from totalitarianism? Will the conduct of business be different in the two systems? How? • What is political risk? How can we manage political risk? • Define the three types legal systems and their implications in international business.

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