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The Political and Legal Environments Facing Business 3-1.

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

3 Political Participation Who participates in them Who participates in themAnd What extend they participate What extend 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 Political Ideologies 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 TotalitarianismAnarchismPluralism

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

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

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

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

9 Comparative Measures of Freedom POLITICAL RIGHTSCIVIL LIBERTIES Partly FreeNot FreeFree 3-7

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

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

13 States in Transition The political of the world has changed radically since the late 1980’s The political of the world has changed radically since the late 1980’s A wave of democratic revolutions swept the world 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 Political Risk—caused by political instability Promotes fear that operating position will deteriorate Promotes fear that operating position will deteriorate Tends to be higher in totalitarian regimes Tends to be higher in totalitarian regimes Sources of political risks Sources of political risks Unstable Political SystemUnstable Political System Political involvement of religious or military leaderPolitical involvement of religious or military leader Frequent changes in governmentFrequent changes in government Corrupt or poor leadershipCorrupt or poor leadership Civil disorder due to:Civil disorder due to: Economic conditions Economic conditions Human rights violations Human rights violations Conflict among races, religions & etnics Conflict among races, religions & etnics Group animosity Group animosity 3-11

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

17 Types of Political Risk

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

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

21 Property Seizure Confiscation The forced transfer of assets from a company to the government without compensation 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

22 Policy changes restrict: Policies and Laws 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. 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 Influencing Local Politics Information Gathering Adaptation Avoidance Risks

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

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

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

28 Legal Systems Rules - laws - that regulate behavior 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: 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 Contract law is the body of law that enforces a contract Specifies conditions under which an exchange is to occurSpecifies conditions under which an exchange is to occur Details rights and obligations of partiesDetails rights and obligations of parties Dispute resolution is often complex Dispute resolution is often complex Where to arbitrate and whose laws apply?Where to arbitrate and whose laws apply? Validity of contracts and decisionsValidity of contracts and decisions Role of United Nations Convention on Contracts for the International Sale of Goods (CIGS) 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 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 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 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 refers to property that is the product of intellectual activity Intellectual property laws are a very important stimulus to innovation and creative work Intellectual property laws are a very important stimulus to innovation and creative work Protection of intellectual property rights differs greatly from country to country 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 safety laws set safety standards for products and manufacturing processes Product liability laws hold the firm and its officers responsible for product safety standards Product liability laws hold the firm and its officers responsible for product safety standards Criminal laws/ civil liability laws Criminal laws/ civil liability laws Civil laws call for payment and monetary damagesCivil laws call for payment and monetary damages Criminal liability laws result in fines or imprisonmentCriminal liability laws result in fines or imprisonment

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

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

38 Attractiveness

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

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

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:


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