International Business Lecture 5: The political and legal environment

1. International Business Lecture 5:The political and legal environment

2. Aims of the lecture • To learn how differing types of political system function, in terms of governmental processes, societies and business interactions. • To gain a critical appreciation of democracy’s progress in differing national environments. • To assess political risk, both internally and internationally. • To appreciate the nature and significance of diverse national legal systems, as well as their interactions with both regional and international legal frameworks. • To assess legal risk for international managers, including both national and international implications.

3. Comparing political systems • Definition: structures and processes by which a nation-state is governed. • Authoritariangovernment – concentration of power in an individual or small group, often military or ideology-based. • Democraticgovernment – system based on accountability of governments to the people, through free elections. • Many political systems fall on a continuum between democracy and authoritarianism: • The market-oriented authoritarian or semi-authoritarian system characterizes numerous emerging economies, where the state guides economic development.

4. Degrees of democracy • States vary in democratic accountability, participation and civil rights. Attributes of democracy include: • Free and fair elections, supported by media freedom • The rule of law, including independent judiciary (though its robustness varies between states) • Civil society – the presence of freely-functioning voluntary groups (including religious, political and labour) is a substantive indicator of genuine pluralism. • Many transition economies are building democratic institutions alongside market structures; however, legacies of authoritarianism remain.

5. Figure 5.1:Features of authoritarianism and democracy

6. Figure 5.2:From authoritarian to democratic: selected countries Source: Kekic, L. (2006) ‘A pause in democracy’s march’, The Economist: The World in 2007 data, www.theworldin.com

7. Branches of government • Executive – carries out government functions, including finances, national security and social welfare. • Legislative – law-making structures and processes; in democracies, based on a national elected assembly. • Judicial– through the court system, officials administer justice and adjudicate in disputes for both individuals and organizations. • Two constitutional principles underpin relations between the three branches: • Separation of powers – each is independent, but… • Checks and balances prevent domination by one branch.

8. Parties and politics • Political activities in most countries are played out via political parties, although they are typically restricted to government-sponsored parties in authoritarian states. • In democratic societies, parties represent a range of views: • Conservative (on the ‘right’), socialist (on the ‘left’), nationalist, religious and rural, among others. • Centrist parties have greater widespread appeal to electorates. • In multiparty systems, a coalition government (formed by two or more parties) is a solution, but can be unstable.

9. Figure 5.3:Respect for institutions in Latin America (2007) Source: ‘A warning for reformers’, The Economist, 17 November 2007

10. Political risk • Businesses value stability and predictability of government policy in assessing location strengths and weaknesses. • Political risk can arise within a country or from external sources. • An authoritarian regime may seem to be more stable than a multiparty democratic one, but appearances can be deceptive. • Factors which can destabilize a government (to which authoritarian governments are particularly vulnerable) include: • Corruption, personalized power centres, factional infighting, institutional power bases (such as the army).

11. Figure 5.4:Internal political risks

12. Figure 5.5:Transparency International’s Corruption Perception Index, selected countries, 2007 Note: 0 = highly corrupt, 10 = highly clean. Rankings appear in brackets Source: Transparency International (2007) Corruption Perception Index, www.transparency.org

13. International political risk • Insecurities in relations between countries create uncertainties which affect international business. • Countries differ in their relative power – in economic, political and military respects – and their businesses often reflect these strengths (and weaknesses). • Regional and cross-border conflicts give rise to risk in many parts of the world, especially affecting operations in resource-rich countries. • In unstable locations and uncertain environments, MNEs must assess risks and work with stakeholders.

14. Figure 5.6:International risks

15. The role of governments in economic activities • Traditional liberal market view is one of minimumintervention, but recent financial crises have prompted direct financial support by US and European governments. • State-owned enterprises, especially in strategic sectors (such as energy), are limbs of the government. • State-controlled enterprises have varying ownership structures – some are listed companies, although the state is the majority shareholder. • State players are a growing force in the global economy, notably China and resource-rich Middle Eastern states.

16. Business regulation • Regulation can be advantageous for businesses, as in government small-business initiatives, but is generally perceived as burdensome and costly. • A trend has been reduction in national regulation. • Businesses may be attracted to countries with little regulation, but the downside may be weak environmental and safety regimes, as well as weak protection of property. • Competition law seeks to control anti-competitive and unfair business practices: • EU competition law targets abuse of a dominant position in the relevant market.

17. Figure 5.7:Business regulation in selected countries

18. Legal frameworks: national to international • The national legal system provides the substantive law and court structure which most directly affect businesses. • MNEs operating in different countries are subject to the national law in each. • Legal systems in democratic societies where the rule of law prevails tend to be more transparent than those in authoritarian countries. • Regional frameworks and international law overlap with national law in several spheres, such as environmental protection.

19. Figure 5.8:Dimensions of the legal environment

20. Legal risk internationally • Legal risk arises when a company needs to launch legal action (such as to enforce a contract) or when it must defend itself against legal action. • In FDI and outsourcing strategies, the MNE is involved in webs of legal relations in foreign environments: ◊ Contracts with suppliers, customers, subcontractors ◊ Liability under employment law and health & safety law ◊ Liability under environmental protection law ◊ Liability for dangerous products ◊ Liability for industrial accidents

21. Figure 5.9: Legal risks in overseas locations

22. Figure 5.10:Most numerous types of litigation in the US and UK (2004) Source: Financial Times, 10 October 2005

23. Legal institutions in the EU • The Council of Ministers is the seat of executive authority. • The European Commission has both legislative and executive powers, such as issuing regulations and directives. • The European Parliament acts as a check on the other institutions, but is not as influential as a national legislature. • EU institutional reforms focus on reducing unwieldy structure, but face objections … • From those fearful of loss of national sovereignty • From those objecting to lack of democratic accountability.

24. International law and business implications • Inter-governmental co-operation has led to a growing body of international law, in the form of conventions and treaties. • There is a growing consensus internationally that in some areas, such as human rights and the environment, international law is setting the standards. • For firms, compliance with international standards, rather than weaker national laws, is increasingly expected by stakeholders, consonant with CSR strategy.

25. Table 5.1: Ratification of major human rights conventions Source: UNDP (2006) Human Development Report 2006 (Basingstoke: Palgrave Macmillan)

26. Conclusions • In both operations and markets, national political and legal systems are key aspects of the environment for MNEs. • Both authoritarian and democratic systems – and many in between – offer opportunities for international business, but… • Political and legal risks arise in countries with authoritarian regimes and weak rule of law. • Achieving corporate goals depends on managing these risks. • The growing importance of international law is concentrating the minds of decision-makers in both governments and MNEs.