International Business International Business 10e Daniels/Radebaugh/Sullivan International Business Chapter Three The Political and Legal Environments Facing Business 2004 Prentice Hall, Inc 3-1

Chapter Objectives Discuss the different functions political systems perform Compare political regimes and how they influence managerial decisions Describe how management formulates and implements strategies to deal with differing political environments Study different types of legal systems and relationships Exam major legal issues in international business 3-2

Political Spectrum 3-3

Introduction The role of the political system is to integrate the various parts of its society into a viable, functioning whole. It also influences the extent to which government intervenes in business, and the way in which business is conducted domestically and internationally.

The Functions of the Political Process Interest Articulation Interest Aggregation Policy Making Policy Implementation and Adjudication

Individualism The general orientation within a society concerning the primacy of the rights and role the individual versus that of the larger community. Individualism: Political officials and agencies have a limited role in society. Make and apply regulations to correct market inefficiencies: accessibility to information, promoting fair and just competition. Government is detached from and independent of the day-to-day practices of business in an individualistic society.

Collectivism Government officials should intervene in the structure of industries, conduct of companies, and actions of managers to ensure they benefit society. Setting up formal and informal partnerships with the business community to develop successful companies. Governments are highly connected to and interdependent with business.

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

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

Political & Legal Influences 3-5

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

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

Totalitarianism A political system in which a single agent, whether an individual, group, or party, monopolizes all political power. Aims to subordinate all aspects of the day-to-day life of people to the power of the state. Merging the concepts of the state and the people. Order is often imposed through military power. Neither recognizes nor permits opposition. Tools used include: violence, persecution, propaganda, censorship. 3-9

Authoritarianism: a political system that aims to rule completely all affairs of all citizens. Fascism: to control people’s minds and souls through the supremacy of the state. Secular Totalitarianism: using the power of the state or the army to enforce control of all aspects of the business environment. Communism and total government ownership and control of the factors of production. Theocratic Totalitarianism: religious leaders are the political leaders,

Trends in Political Systems 1. Breakdown of Totalitarian Regimes. Many totalitarian regimes failed to deliver economic progress to the vast majority of their populations. 2. Improved Communication Technology Weakened the ability of totalitarian states to control citizens’ access to information. 3. Higher Standards of Living

State of Totalitarianism Multi-ethnic societies where power is not held by a dominant ethnic group Neocommunist or post communist transitional societies Many are creeping towards market model Political changes Economic changes 3-10

Political Risks for International Business The chance that political decisions, events, or conditions in a country will affect the business environment in ways that lead investors: To lose some or all of the value of their investment, or Be forced to accept a lower than expected rate of return. 3-11

Sources of Political Risk Systemic: Political risk created by shifts in public policy, such as a new political leadership that may adopt a different approach than its predecessor. Procedural: Political actions can sometimes create frictions that interfere with the procedural transactions between units. (Government corruption, labor disputes, a partisan judicial system) Distributive: Political actions that aim to claim a greater share of rewards. Catastrophic: Random political developments.

Political System 3-12

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

Legal Environment Common law systems (tradition/precedent) United States United Kingdom Civil law: based on a systematic and extensive codification of laws. Political officials prepare a written collection of laws. Judges apply existing laws instead of creating them. Germany France Japan Theocratic law (based on religious principles and rules) Islamic Law that is based on the Qur’an, the practices of the prophet, the writings of scholars, and consensus of the community. Sudan Pakistan A Customary Law System: follows the wisdom of daily experience. A Mixed Legal System. 3-14

Impact of Laws on International Business National laws affect all local business activities. National laws affect cross-border activities. International treaties and conventions may govern some cross-border transactions.

Legal Issues in International Business Managers look at legal issues from two perspectives: Operational (Procedural) Concerns: How do legal regulations impact day-to-day operations? starting a business, hiring and firing, entering and enforcing contracts, closing down the business

Legal Issues in International Business Strategic Concerns: How do legal regulations affect companies’ long-term competitiveness? Product safety and liability Marketplace behaviour Product origin Legal jurisdiction Arbitration

Intellectual Property Rights (IPRs) Now, countries are competing on the strength of their brainpower to create might, prestige, and wealth. The output of this brainpower is called intellectual property – books, designs,brand names, software. Problems occur because IP is hard to conceive but easy to copy. (Piracy) IPRs refer to the right to control and derive the benefits from writing (copyrights), inventions (patents), processes (trade secrets),and identifiers (trademarks).

Intellectual Property Rights (IPRs) Legal problems arise because countries because not all countries formally support the various conventions that protect IPRs. The Paris Convention for the Protection of Industrial Property The Berne Convention for the Protection of Literary and Artisitic Works. The Trade Related Aspects of Intellectual Property Rights (TRIPS) code of the WTO.

Why Some Countries are Less Inclined to Protect IPRs 1. Level of Economic Development: Poorer countries provide weaker legal protection than do richer countries. Rich countries: protecting ideas is the only way to energize the incentive to innovate. Poor countries: Strict protection of IPRs restricts the diffusion of new technologies, inflates the prices, inhibits economic development by controlling the use of existing knowledge. 2. National Cultural Attributes: Individualist v. Collectivist Orientations

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

Chapter Review Discuss the different functions political systems perform Compare political regimes and how they influence managerial decisions Describe how management formulates and implements strategies to deal with differing political environments Study different types of legal systems and relationships Exam major legal issues in international business 3-16