1. Politics, Law, and Business Ethics3
Politics, Law, and Business Ethics
Welcome to Chapter 3, Politics, Law, and Business Ethics.
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2. Chapter Objectives Describe each main type of political system
Identify the origins of political risk and how managers can reduce its effects
Describe each main type of legal system and some important global legal issues
Explain ethics and social responsibility and key issues facing international companies
Explain how international relations affect international business activities
In this chapter, you will explore political and legal systems around the world.
You will also:
Learn how companies monitor and manage political risks.
Acquaint yourself with ethics and social responsibility issues in a global context.
Explore how relations among countries affect international business.
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3. PepsiCo Healthier snacks Lighter impact Employee welfare
PepsiCo’s international sales account for 40 percent of its total revenue, so the company strives to be a model citizen everywhere it operates.
To that end, PepsiCo is balancing a drive for profits with making healthier snacks, decreasing its environmental impact, and taking good care of its workforce.
This means that PepsiCo must carefully navigate unfamiliar political and legal systems as it does business in other countries.
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4. Roles of History and Culture
Every nation’s political and legal systems are rooted in its people’s history and culture.
National history and culture are then reflected in values such as individual responsibility, law and order, free enterprise, and the role of family.
Other factors that help form political and legal systems include population, age and race composition, and per capita income.
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5. Political Ideologies 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
Only individuals and
private groups can
preserve personal liberties
Totalitarianism
Anarchism
Pluralism
We can arrange the world’s three political ideologies on a horizontal scale.
At one extreme is totalitarianism—the belief that every aspect of people’s lives must be controlled to preserve order.
At the other extreme is anarchism—the belief that only individuals and private groups can preserve political liberties.
In-between lies pluralism—the belief that both private and public groups belong in politics.
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6. Totalitarianism Imposed authority Lack of constitutional guarantees
Leaders govern without people’s support
Government controls much of people’s lives
Leaders do not tolerate opposing viewpoints
In totalitarian governments, individuals govern without the support of the people, tightly control people’s lives, and do not tolerate opposing viewpoints.
Totalitarian governments tend to share three features:
Authority imposed on people
A lack of constitutional guarantees
Restricted political participation
Imposed
authority
Lack of
constitutional
guarantees
Restricted
participation
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7. Forms of Totalitarianism
Theocratic totalitarianism
(totalitarian religious leadership)
Secular totalitarianism
(military and bureaucratic leadership)
The two major types of totalitarianism are:
Theocratic totalitarianism—which is controlled by totalitarian religious leaders.
Secular totalitarianism—in which leaders rely on military and bureaucratic power for control.
There are three sub-types of secular totalitarianism:
Communist totalitarianism (or simply communism) argues that social and economic equality can only be obtained by establishing an all-powerful Communist party and by granting the government ownership and control over all types of economic activity.
Tribal totalitarianism is a system whereby one ethnic group imposes its will on other ethnic groups within a nation.
Right-wing totalitarianism is a system whereby government endorses private ownership of property and a market-based economy, but grants few (if any) political freedoms.
Tribal totalitarianism
Communist totalitarianism
Right-wing totalitarianism
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8. Business in Totalitarian Nations
Risk Factors
Arbitrary nature of business can mean that laws are vague or do not exist
Bureaucrats may interpret laws however they wish
Doing business in totalitarian countries can be a risky venture because laws can be vague or nonexistent and powerful officials can interpret laws at will.
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9. Global Sustainability: From Civil War to Civil Society
War’s causes:
Poverty
Slow economic growth
Natural resource dependency
War’s costs:
$5 billion in health losses
GDP falls by 2.2%
Recovery takes 10 years
The root causes of war are often poverty, slow economic growth, and dependency on natural resources.
As the warring parties battle each other, global investors flee and stay away.
The average civil conflict results in $5 billion in health-related costs and a drop of 2.2 percent in GDP. Meanwhile, full economic recovery takes a decade.
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10. Democracy
Government leaders are elected directly by the wide participation of the people or their representatives
A democracy is a political system in which government leaders are elected directly by the wide participation of the people or their representatives.
In representative democracies, citizens elect individuals from their groups to represent their political views.
Shown here, election workers in Libya collect ballot boxes from polling stations for final counting.
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11. Life and Business in Democracies
Freedom of expression
Periodic elections
Full civil and property rights
Minority rights
Nonpolitical bureaucracies
Representative democracies strive to provide five freedoms: freedom of expression; periodic elections; full civil and property rights; minority rights; and nonpolitical bureaucracies.
Democracies tend to maintain stable business environments through laws protecting individual property rights.
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12. Discussion Question
What are the three main features of totalitarianism and the five freedoms that democracies strive to provide?
What are the three main features of totalitarianism and the five freedoms that democracies strive to provide?
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13. Answer to Discussion Question
Totalitarian governments tend to share imposed authority, a lack of constitutional guarantees, and restricted political participation
Democracies strive to provide freedom of expression, periodic elections, full civil and property rights, minority rights, and nonpolitical bureaucracies
Answer:
Totalitarian governments tend to share: imposed authority, a lack of constitutional guarantees, and restricted political participation.
Democracies strive to provide: freedom of expression, periodic elections, full civil and property rights, minority rights, and nonpolitical bureaucracies.
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14. Types of Political Risk
Conflict and violence
Terrorism and kidnapping
Property seizure
Broadly speaking, political risk belongs to one of two types:
Macro risk threatens all companies regardless of industry and affects domestic and non-domestic businesses alike.
Micro risk threatens companies within a particular industry or even a segment of an industry.
Five events that cause political risk are: conflict and violence, terrorism and kidnapping, property seizure, policy changes, and local content requirements.
Policy changes
Local content requirements
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15. 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
Local conflict and violence can arise from: resentment toward the government; territorial disputes; and ethnic, racial, and religious disputes.
They hinder the procurement of materials and equipment, impair manufacturing and distribution activities, and threaten the safety of personnel.
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16. Manager’s Briefcase: Your Global Security Checklist
Fly nonstop 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
Travel with others when possible and ask directions guardedly
Know local emergency procedures before trouble strikes
Terrorism and kidnapping are used to make political statements through fear and destruction.
Shown here is a brief checklist for managers to follow while abroad on business.
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17. Forced asset transfer to the government of an entire industry
Property Seizure 1
Confiscation
Forced transfer of assets from a company to the government without compensation 2
Expropriation
Forced transfer of assets from a company to the government with compensation
Government seizures of property can take three forms:
Confiscation is the forced transfer of assets to the government without compensation.
Expropriation is the transfer of assets to the government with compensation. No framework for legal appeal exists and compensation is often far below market value.
Nationalization involves government takeover of an entire industry and is more common than either confiscation or expropriation. 3
Nationalization
Forced asset transfer to the government of an entire industry
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18. Local content requirements: Policy changes restrict:
Policies and Laws
Local content requirements:
Policy changes restrict:
Foreign ownership
Investment levels
Business activities
Specify the portion
of a good or service to be supplied
by local firms
Policy changes arise from newly empowered political parties, pressure from special interests, and civil or social unrest.
Policy tools can restrict ownership to domestic companies, limit ownership by non-domestic firms to a minority stake, or restrict certain cross-border investments altogether.
Local content requirements specify an amount of a product to be supplied locally.
They are intended to foster local business activity and create jobs by forcing companies to use local raw materials, procure parts from local suppliers, or employ local workers.
But they may force a firm to take on poorly trained or excess workers, increase costs due to more expensive local materials, and reduce quality if local materials are inferior.
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19. Managing Political Risk I
Localization
Development assistance
Partnerships
Insurance
Adaptation
Incorporate risk into
business strategies
Companies may try to manage political risk through adaptation—which incorporates risk into business strategies.
Four adaptation strategies are:
Forming informal or formal partnerships to leverage expansion plans.
Localizing (or modifying) operations, the product mix, or some other element to suit local tastes and culture.
Offering development assistance to improve local distribution and communications networks and improve the quality of life.
Obtaining insurance to protect the company against losses and to obtain project financing.
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20. Managing Political Risk II
Agencies specializing
in political-risk services
Current employees
with relevant information
Information gathering
Gather data to better
predict and manage risk
Companies may also try to manage political risk through information gathering that can improve forecasts.
Sources of information include:
Current employees who worked in the country and have valuable contacts and knowledge.
Agencies specializing in political-risk services, including banks, political consultants, and risk-assessment services.
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21. Managing Political Risk III
Corruption
Foreign Corrupt Practices Act
Lobbying
Influencing local lawmakers
Influence local politics
Present firm’s views
on political matters
Finally, companies may try to manage political risk through political influence—which involves dealing with local lawmakers and politicians directly or through lobbyists.
U.S. companies must be careful not to violate the Foreign Corrupt Practices Act—which forbids the bribing of government officials or political candidates in other countries (unless a person’s life is in danger).
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22. Discussion Question
Incorporating political risk into business strategies by modifying operations, the product mix, or some other business element is called ____________.
a. Specialization
b. Globalization
c. Localization
Incorporating political risk into business strategies by modifying operations, the product mix, or some other business element is called ____________.
a. Specialization
b. Globalization
c. Localization
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23. Answer to Discussion Question
Incorporating political risk into business strategies by modifying operations, the product mix, or some other business element is called ____________.
a. Specialization
b. Globalization
c. Localization
The correct answer is c. Localization
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24. Past cases before the courts Nation’s legal history
Common Law
Precedent
Past cases before the courts
Usage
How laws are applied
Tradition
Nation’s legal history
The common law system originated in England ten centuries ago. Common law is flexible because it takes into account particular situations and circumstances. It is based on:
Tradition, or a nation’s legal history.
Precedent, or past cases that have come before the courts.
And usage, or how laws are applied in specific situations.
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25. Civil Law Dates to Roman times in the fifth century B.C.
Rules and statutes constitute a legal code
Defines all obligations, responsibilities, and privileges
Dates to Roman times in the fifth century B.C.
Civil law can be traced to Rome in the fifth century B.C. and is the most common legal tradition.
It is based on a detailed set of written rules and statutes that constitute a legal code.
It can be less adversarial than common law because the legal code defines all obligations, responsibilities, and privileges of the parties to a contract.
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26. Legal tradition based on religious teachings
Theocratic Law
Legal tradition based on religious teachings
Islamic law Jewish law Hindu law
Firms operating in countries with theocratic legal systems must be sensitive to local values and beliefs.
They must evaluate their activities, including hiring practices and investment policies, to ensure compliance with the law, local values, and beliefs.
Islamic law is the most widely practiced theocratic legal system today.
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27. Global Legal Issues I Intellectual property
Result of intellectual talent and abilities
Piracy/counterfeits a serious problem
Patent
Excludes all but the inventor from making, using,
or selling the invention (WTO = 20 years)
Trademark
Words or symbols that distinguish a product and
its manufacturer ("Coca-Cola")
Copyright
Freedom of creator to publish or dispose of original
works as they choose ("Happy Birthday to You")
Intellectual property results from intellectual talent and abilities to produce things such as graphic designs, novels, computer software, machine-tool designs, and secret formulas.
A patent is a right granted to the inventor of a product or process that excludes others from making, using, or selling the invention.
Trademarks are words or symbols that distinguish a product and its manufacturer. Trademark protection lasts indefinitely, provided the word or symbol continues to be distinctive.
Copyrights give creators of original works the freedom to publish or dispose of them as they choose.
A copyright holder can reproduce the work, derive new works from it, sell or distribute it, perform it, and display it publicly.
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28. Business Software Piracy
This figure illustrates the lax nature of intellectual property rights laws in certain nations.
Each year, business software piracy costs software makers around $59 billion globally.
Source: Based on the Eighth Annual BSA and IDC Global Software Piracy Study (Washington, D.C.; Business Software Alliance, May 2011), pp. 8–9, (
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29. Global Legal Issues II Standardization Product safety and liability
Interpreting and applying laws uniformly
Product safety and liability
Responsibility for damage, injury, or death
Taxation
Income, sales, consumption, and VAT
Antitrust (antimonopoly) laws
Prevent market sharing, price fixing, and unfair advantage
Standardization refers to uniformity in interpreting and applying laws across countries, not to the standardizing of entire legal systems.
Developed nations have the toughest product liability laws, whereas emerging markets tend to have weaker laws.
Consumption taxes help pay for the consequences of using particular products and can be used to make imports more expensive.
A value-added tax, which is common across Europe, is levied on each party that adds value to a product throughout its production and distribution.
Antitrust (antimonopoly) laws help ensure availability of a wide variety of products at fair prices.
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30. Discussion Question
What are intellectual property rights and what is their significance to business?
What are intellectual property rights and what is their significance to business?
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31. Answer to Discussion Question
Intellectual property rights are legal rights to resources that result from intellectual abilities and any income the resources generate.
They can be traded, sold, and licensed in return for fees and/or royalty payments.
Intellectual property laws are designed to compensate people whose property rights are violated.
Answer:
Intellectual property rights are legal rights to resources that result from intellectual abilities and any income these resources generate. Like other types of property, it can be traded, sold, and licensed in return for fees and/or royalty payments. Intellectual property laws are designed to compensate people whose property rights are violated.
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32. Ethics and Social Responsibility
PHILOSOPHIES
Friedman View
Cultural Relativism
There are four philosophies of ethics and social responsibility.
The Friedman view argues that a company’s sole responsibility is to maximize profits for its owners (or shareholders) while operating within the law.
This view has lost popularity because it argues that companies do NOT have “social” obligations.
The cultural relativist view says that a company should adopt local ethics wherever it operates because right and wrong are determined within a cultural context.
“When in Rome, do as the Romans do” captures the essence of this view.
The righteous moralist view argues that a company should maintain its home-country ethics wherever it operates because its ethics are superior.
If headquarters instructs a subsidiary manager to refrain from bribing local officials, it imposes its righteous moralist view on the local manager.
The utilitarian view says that a company should behave in a way that maximizes “good” outcomes and minimizes “bad” outcomes wherever it operates.
A utilitarian manager will take the action that produces the best outcome for all affected parties.
Righteous Moralism
Utilitarianism
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33. Corporate Social Responsibility Issues
Going beyond legal obligations to balance
commitments to investors, customers,
communities, and other companies
Fight to eliminate bribery and corruption
Improve labor conditions and guard human rights
Practice fair trade to help the disadvantaged
Protect the environment and conserve resources
We define corporate social responsibility as the practice of going beyond legal obligations to balance commitments to investors, customers, communities, and other companies.
Socially responsible businesses fight bribery and corruption because it misallocates resources, hurts economic development, and damages the integrity of free markets.
Responsible businesses monitor their own behavior and that of their employees and business partners to uphold good labor conditions and human rights.
They may also promote fair trade practices—which involve companies working with suppliers in more equitable, meaningful, and sustainable ways.
Finally, companies today pursue “green” initiatives to reduce their toll on the environment and to reduce operating costs and boost profit margins.
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34. International Relations
Favorable international
political relations foster:
Stable business environments
Improved business communications
Efficient distribution systems
Expanded opportunities
Diminished risk levels
Prompt and equitable dispute resolution
Favorable international political relations foster stable business environments, improved business communications, efficient distribution systems, expanded business opportunities, and lower risk levels.
These benefits, however, rest on a strong legal system that can resolve disputes promptly and equitably.
The United Nations and its many agencies are part of that legal system.
The UN’s Conference on Trade and Development has a very broad mandate in facilitating worldwide trade and economic development.
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35. Discussion Question
The philosophy of business ethics and social responsibility conveyed by the expression, “When in Rome, do as the Romans do,” is called the __________ view.
a. Righteous moralist
b. Cultural relativist
c. Utilitarian
The philosophy of business ethics and social responsibility conveyed by the expression, “When in Rome, do as the Romans do,” is called the __________ view.
a. Righteous moralist
b. Cultural relativist
c. Utilitarian
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36. Answer to Discussion Question
The philosophy of business ethics and social responsibility conveyed by the expression, “When in Rome, do as the Romans do,” is called the __________ view.
a. Righteous moralist
b. Cultural relativist
c. Utilitarian
The correct answer is b. Cultural relativist
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37. Copyright © 2014 Pearson Education, Inc.
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.
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