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The Political and Legal Environment

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1 The Political and Legal Environment
International Business Oded Shenkar and Yadong Luo Chapter 7 The Political and Legal Environment Chapter 7: The Legal and Political Environment

2 Do You Know? How do politics affect international trade and foreign investment? Can you distinguish between different types of political risk? How can an MNE engage the political organizations that most affect its operation and performance? Chapter 7: The Legal and Political Environment

3 Do You Know? What are the challenges of working in countries whose legal systems are different from that of the MNE’s home country? What levels of jurisdiction need an MNE be concerned with? How do laws regarding competition, product liability, and the like affect the MNE’s operations and competitive advantage? Chapter 7: The Legal and Political Environment

4 The Political Environment
Politics plays an important role in international business. Political behavior is defined as the acquisition, development, securing, and use of power in relation to other entities, where power is viewed as the capacity of social actors to overcome the resistance of other social actors Chapter 7: The Legal and Political Environment

5 The Institutional Context
Organizations work closely with governments and political actors in a pluralistic environment. Frequently, business objectives require the cooperation of political authority and managers find themselves working with government officials and ministries to clear the way for operations. The ease of this work depends on the institutional context they face in their negotiations. Chapter 7: The Legal and Political Environment

6 The Institutional Context
Managers sometimes work with governments that are similar to their own. This makes the work easier, due to affinity between the company and the political actors, with common understanding of how a system works. Sometimes, however, managers find themselves working with governments that are very different. This sometimes presents an animosity of systems that make the work a great deal more frustrating and difficult. Chapter 7: The Legal and Political Environment

7 The MNE-Government Relationship
Relationships between governments in the home and host countries are an important issue facing Multinational Enterprises. Governments affect the economic and legal environment. They set monetary and tax policies, price controls, and intellectual property regulations. They also influence labor relations, trade policies, capital and exchange controls, and transfer pricing policies. Government can be a regulator, a legislator, a competitor, a customer, a distributor, and a potential partner. Chapter 7: The Legal and Political Environment

8 The MNE Relationship with Host Government
Political power and size have a great deal to do with how Multinational Enterprises deal with host governments. Models like Sovereignty at Bay, Dependency, and Neo-Mercantilism all assume a powerful MNE interacting with a less powerful developing country. Some assume that the MNE doesn’t act in the LDC’s best interest, and will pursue institutional hegemony and control over that LDC. Chapter 7: The Legal and Political Environment

9 The MNE Relationship with the Host Government
Coopetition - a simultaneous cooperation and competition in the relationship between Multinational Enterprise and Host. Multinational Enterprises compete with hosts in establishing policy that is favorable. They cooperate with hosts in providing things governments want: capital, employment, revenues, and legitimacy Chapter 7: The Legal and Political Environment

10 MNE Political Objectives in the Host Country
Favorable Trade And Investment Environment Nondiscrimination Access To Markets Few Regulatory Hurdles Legitimacy Chapter 7: The Legal and Political Environment

11 Local Government Objectives
Protecting Vital Interests National Security Taxation Participation Protection Of Markets And Employment Legitimacy Chapter 7: The Legal and Political Environment

12 The Bargaining Power of the MNE and the Host Government
Host bargaining power comes from creating an attractive environment. Multinational Enterprise bargaining power comes from: Proprietary technologies or products Capital Potential tax revenue Big exports Employment Complex management requirements Political/economic alliances Chapter 7: The Legal and Political Environment

13 Government Investment Support
Governments compete fiercely for investment. They frequently provide incentives to companies seeking to invest. These include: grants and investment allowances subsidies preferential tax treatment import duty exemptions loans loan guarantees interest subsidies These incentives can exceed $100 Million to $ 1 Billion. Chapter 7: The Legal and Political Environment

14 The MNE and Its Home Government
The home government remains important to the Multinational Enterprise. Provides its main operating environment Helps negotiate its international affairs and incentives Provides its own incentives for foreign investment to targeted areas. The home government can even close the home environment to competition. Chapter 7: The Legal and Political Environment

15 The MNE and Its Home Government
Exhibit 7-1: Governmental means used to secure “unfair” advantage Chapter 7: The Legal and Political Environment

16 The MNE and Its Home Government
Exhibit 7-2: Country rankings on helping the MNEs obtain “unfair” advantage Chapter 7: The Legal and Political Environment

17 Coalition Building and Influence Tactics
Nations and governments are not unitary entities, but collections of individuals, political parties, interest groups, and agencies. Political interests influence the general approach not only toward trade but also specific goods and services. Chapter 7: The Legal and Political Environment

18 Political Risk Political risk is the probability of disruption of operation from political forces or events and their correlates. Risk comes from instability, whether that is political, economic, regulatory, policy oriented, judicial, and conflict oriented. (The next slide shows the Index of Economic Freedom, 2002) Chapter 7: The Legal and Political Environment

19 Political Risk Chapter 7: The Legal and Political Environment

20 The Measurement of Political Risk
The political landscape is difficult to forecast. Political risk can result from shifting power or balance. Methods of measuring political risk: Qualitative approaches Aggregates of expert opinions Scenario approaches Decision-tree methods Quantitative techniques Chapter 7: The Legal and Political Environment

21 The Measurement of Political Risk
Exhibit 7-4: Risk of political instability Chapter 7: The Legal and Political Environment

22 Types of Political Risk
Ownership Risk – potential threats to ownership from nationalization or seizure. Operational Risk – threats governments impose for “changing the rules of the game.” Transfer Risk – impediments to the transfer of production factors, products or capital. Chapter 7: The Legal and Political Environment

23 Strategies for Managing Political Risk
Minimize outright investment. Sign treaties that encourage and protect mutual investment. Create settings where investment can be seized when threatened. Avoid acquisition of national icon stature firms. Utilize host country financing. Accelerate profit repatriation. Create staggered technology transfer policies. Create local sourcing arrangements. Chapter 7: The Legal and Political Environment

24 Strategies for Managing Political Risk
Create alliances with powerful local partners. Utilize insurance agencies that specialize in political risk. Build political support at home and in the host through political action, lobbying, or other proactive measure. Continuously monitor political and economic development in order to prepare for changing political risk. Remember that “business is international, but all politics are local.” Try to manage political relationships at the local levels. Chapter 7: The Legal and Political Environment

25 Regional Level Politics
In addition to national governments, regions are influential in the political arena. Regional and federated organizations States Provinces Indigenous peoples Chapter 7: The Legal and Political Environment

26 Micro-Region Political Processes
Micro-regions (below state level) also play a role in international business. Exhibit 7-5: European investment in Columbus, Ohio Chapter 7: The Legal and Political Environment

27 The Legal Environment The Common Law System Civil Law System
An independent judicial system that relies legislative action, judicial interpretation through case precedent, and application by users. The United Kingdom, United States, Australia, and Canada Civil Law System Relies almost exclusively on a legal code that is applied universally. Less flexible than a common law system and requires frequent governmental intervention. Most of Continental Europe and Latin America Chapter 7: The Legal and Political Environment

28 The Legal Environment The Theocratic System
Uses religious codes to create a legal system. Islamic countries frequently use a theocratic system called a “shariah”. While some countries exclusively use Shariah systems, like Saudi Arabia and Iran, others use a mixture of common, civil, and religious law. Examples of these countries are Malaysia, Singapore, and Indonesia. Chapter 7: The Legal and Political Environment

29 The Legal Environment Exhibit 7-6: Fair administration of justice
Chapter 7: The Legal and Political Environment

30 Legal Jurisdiction Legal jurisdiction is the prevailing legal authority under which a legal case can be judged. It is frequently very difficult to determine jurisdiction in international business. Multinational Enterprises are subject to laws in all countries they operate within. This is more difficult in globalization, since it is more and more difficult to determine the true origins of products. Firms often find they are subject to more than one jurisdiction. Chapter 7: The Legal and Political Environment

31 Legal Jurisdiction Jurisdictional Levels International Jurisdiction
International level – international law and regulatory systems Regional-global level – laws and regulations of a regional entity National level International Jurisdiction International law rarely enforced Parties often agree in advance to an arbitration authority Recent globalization of international business regulations Chapter 7: The Legal and Political Environment

32 Regional Jurisdiction
Regional bodies are enacting and enforcing laws. Uncertain if regional jurisdiction supersedes national jurisdiction. Chapter 7: The Legal and Political Environment

33 National Jurisdiction
MNEs must comply with both domestic jurisdiction at home and foreign jurisdiction. MNEs my become more vulnerable to suits filed at home concerning their foreign operations. Chapter 7: The Legal and Political Environment

34 Legal Issues of Interest
Product Origin laws frequently determine duties and tariffs to be paid. This is more and more difficult to determine with globalization. Competition laws, like antitrust regulations and insider trading laws, vary widely from country to country. Chapter 7: The Legal and Political Environment

35 Legal Issues of Interest
Marketing and Distribution laws that determine allowable practices vary widely. Product Liability laws determine liability and allowable damages for product safety. These vary widely. Chapter 7: The Legal and Political Environment

36 Treaties Treaties are agreements signed by two or more nations.
Bilateral – signed by two nations Multilateral – signed by more than two nations Law-making treaty A multilateral treaty that is ratified by many countries with a joint interest in an issue Treaties of Friendship, Commerce and Navigation (FCN) Provides firms with the same rights and privileges enjoyed by domestic business Most Favored Nation (MRN) Entitles the signatory state to a treatment as favorable as that provided to other countries Chapter 7: The Legal and Political Environment

37 Patent Laws Patents are nationally based.
A patent issued in one country does not provide protection in other countries. Separate patent applications must be made in each country. First to invent – grants patent protection to the person who first invented the technology or product. First to file – grants patent protection to the first to file, without need to prove he/she was the inventor. Chapter 7: The Legal and Political Environment


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