The Political and Legal Environments Facing Business

1. The Political and Legal Environments Facing Business 3-1

2. Political System • Political system includes the structures, processes, and activities by which a nation governs itself. • Political systems can be assessed according to two dimensions • Degree to which they emphasize collectivism as opposed to individualism • Degree to which they are democratic or totalitarian

3. Political Participation • Who participates in them And • Whatextend they participate • Wide participation occurs when people capable of influencing the political system make an effort to do so • Narrow participation occurs when few people participate

4. Totalitarianism Anarchism Pluralism Both private and public groups need to balance each other’s power • Every aspect of • people’s lives must be • controlled to preserve order • - No individual liberties Only individuals and private groups can preserve personal liberties Political Ideologies

5. Political Ideologies • Most modern societies are pluralistic politically • Arise due to differences in languages, ethnic background, tribal groups or religions

6. Democracy Totalitarianism The Political Spectrum Authoritarian Conservative Fascist Democratic Government Nondemocratic Government Liberal Communist

7. Indicators of Political Rights • Degree to which fair and competitive elections occur • Ability of voters to endow representatives with real power • Ability to organize political parties • Existence of safeguards on the rights of minorities 3-4

8. Indicators of Civil Liberties • Existence of freedom of the press • Equality under the law for all individuals • Extent of personal social freedoms • Degree of freedom from extreme governmental indifference or corruption 3-6

9. POLITICAL RIGHTS CIVIL LIBERTIES Comparative Measures of Freedom Not Free Partly Free Free 3-7

11. Democracy • Freedom of opinion, expression, press and organization • Elections • Limited terms for elected officials • Independent court system • High regard for individual rights • Respect for property • Nonpolitical bureaucracy and defense infrastructure • Accessibility to the decision-making process 3-8

12. Totalitarianism • Typically theocratic or secular • Opposite end of the political spectrum from democracy • Order is often imposed through military power • Single party, group, or individual monopolizes political power • Lack of constitutional guarantees • Neither recognizes nor permits opposition • Fascism • Authoritarianism (tribal, right-wing) • Communism/ socialism 3-9

13. States in Transition • The political of the world has changed radically since the late 1980’s • A wave of democratic revolutions swept the world

14. The Spread of Democracy

15. Political Risks for International Business • Political Risk—caused by political instability • Promotes fear that operating position will deteriorate • Tends to be higher in totalitarian regimes • Sources of political risks • Unstable Political System • Political involvement of religious or military leader • Frequent changes in government • Corrupt or poor leadership • Civil disorder due to: • Economic conditions • Human rights violations • Conflict among races, religions & etnics • Group animosity 3-11

16. Can cause: • Procurement difficulties • Work stoppages • Shipment delays • Property damage • Types of political risk • Micro—political actions are aimed at specific foreign investments • Eg; Pakistan, France • Macro—politicalactions affect a broad spectrum of foreign investors • Eg; Cuba

17. Types of Political Risk

18. Conflict and Violence Arises from: Reduces ability to: • People’s resentment toward government • Territorial disputes between nations • Ethnic, racial or religious disputes • Obtain materials and equipment • Manufacture and distribute products • Protect employees’ lives and firm’s assets

19. Terrorism and Kidnapping • Kidnapping and other terrorist activities are means of making political statements. • Kidnapping and the taking of hostages may be used to fund a terrorist group’s activities. Executives of large international companies are prime targets.

20. Terrorism and Kidnapping • Fly non-stop when possible and avoid unsecured areas of airports • During your stay, vary your routines and means of transportation • Keep a low profile and refrain from loud, flashy behavior • Give friendly but cautious answers to personal questions • Know local emergency procedures before trouble strikes Security checklist for managers on businessabroad:

21. Confiscation The forced transfer of assets from a companyto the government without compensation 1 2 3 Expropriation The forced transfer of assets from a company to the government with compensation Nationalization When expropriation involves one or a small number of companies in an industry, the government may take over an entire industry Property Seizure

22. Policies and Laws Policy changes restrict: • Foreign ownership • Investment levels • Business activities

23. Local Content Requirements • Laws stipulating that a specified amount of a good or service be supplied by producers in the domestic market. These requirements can force companies to use locally available raw materials, procure parts from local suppliers, or employ a minimum number of local workers.

24. Managing Political Risk Avoidance InfluencingLocalPolitics Risks Adaptation InformationGathering

25. Local equity / debt Localization Development assistance Partnerships Insurance Managing Political Risk Adaptation Incorporate risk into business strategies

26. Current employees with relevant information Agencies specializing in political-risk services Managing Political Risk Information gathering Gather data to better predict and manage risk

27. Lobbying Influencing local lawmakers Corruption Foreign Corrupt Practices Act Managing Political Risk Influence local politics Present firm’s views on political matters

28. Legal Systems • Rules - laws - that regulate behavior • Processes through which laws are enforced & grievances are redressed • Three main types of legal systems – in use around the world: • Common law • Civil law • Theocratic law

29. Kinds of Legal Systems • Common law—based on tradition, precedent, custom, and usage • Interpretation by the courts • US and UK • Civil law—codified legal system • Based on a detailed set of laws that make up a code • Rules for business transaction included • Based on how the law is applied to the facts • Germany France, Japan • Theocratic law—based on religious precepts • e.g., Islamic law • has remained frozen • moral rather than commercial law • intended to govern all aspects of life • Sudan and Pakistan

30. Contract Law • Contract law is the body of law that enforces a contract • Specifies conditions under which an exchange is to occur • Details rights and obligations of parties • Dispute resolution is often complex • Where to arbitrate and whose laws apply? • Validity of contracts and decisions • Role of United Nations Convention on Contracts for the International Sale of Goods (CIGS)

31. Foreign Corrupt Practices Act • The act was passed during the 1970s following revelations that U.S. companies had bribed government officials in foreign countries in an attempt to win lucrative contracts • This law makes it illegal to bribe a foreign government official in order to obtain or maintain business • The act allows facilitating or expediting payments to secure the performance of a routine governmental action

32. Corruption as of 2004

33. Intellectual Property Rights • Intellectual property refers to property that is the product of intellectual activity • Intellectual property laws are a very important stimulus to innovation and creative work • Protection of intellectual property rights differs greatly from country to country

34. Piracy of Intellectual Property

35. Product Safety and Liability • Product safety laws set safety standards for products and manufacturing processes • Product liability laws hold the firm and its officers responsible for product safety standards • Criminal laws/ civil liability laws • Civil laws call for payment and monetary damages • Criminal liability laws result in fines or imprisonment

36. Other Legal Issues for International Businesses • Worker relations • Health and safety standards • Workweek • Employment practices • Antitrust prohibitions • Environmental practices • Patents, trademarks, and intellectual property protection • Taxes and reporting requirements 3-15

37. Political Strategies for International Businesses • Identify the exact issue • Trade barrier? • Environmental standards? • Workers rights, etc? • Define/determine the political aspect of the issue • Assess the potential political action of other companies • Identify important institutions and individuals • Formulate strategies • Key objectives • Alternatives • Probable effectiveness 3-13

38. Attractiveness

39. Enron Tyco Worldcom Parmalat (Italy) Ethical Behavior Personal behavior in accordance with rules or standards for right conduct or morality Ethical absolutism Import ethics from home Ethical relativism When in Rome, do as the Romans

40. Social Responsibility Go beyond legal obligations to balance commitments to investors, customers, communities and other companies • Respect consumers’ rights • Guard workers’ rights • Protect the environment • Preserve employment • Encourage development • Improve health • Support education

41. International Relations • Stable business environments • Improved business communications • Efficient distribution systems • Prompt and equitable dispute resolution • Expanded opportunities • Diminished risk levels Favorable international political relations foster: