International Business Chapter Three The Political and Legal Environments Facing Business

Chapter Objectives To discuss the different goals and functions of political systems To profile trends in the emergence and diffusion of political systems To identify the idea of political risk and approaches to managing it To understand how different political and legal systems affect the conduct of business To profile trends in the evolution and diffusion of legal systems To examine the major legal issues facing international business companies To profile the idea of intellectual property and the bases of concern and controversy

Political System Defined Political system: the complete set of institutions, political organizations, and interest groups, the relationships amongst those institutions, and the political norms and rules that govern their functions The ultimate test of any political system is its ability to hold a society together.

Fig. 3.1: Political and Legal Influences on International Business

Ways to Assess Political Systems Individualistic -people accept the primacy of individual freedoms in the political, economic, and cultural realms -people believe in minimal government intervention • Collectivist -people reason that the needs of society take precedence over the needs of the individual -people believe that it is the government’s role to define the needs and priorities of the country Collectivist paradigms may be either democratic (Japanese) or authoritarian (Chinese) in nature.

Political Ideology Defined Political ideology: the body of constructs, theories, and aims that constitute a sociopolitical program • Pluralism indicates the coexistence of a variety of ideologies within a particular society. • Shared ideologies create bonds within and between countries; differing ideologies split societies apart.

Types of Political Ideologies: The Two Extremes Democracy: widespread citizen participation in the decision-making and governance processes, either directly or through elected representatives • Totalitarianism: the monopolization of power by a single agent; opposition is neither recognized nor tolerated In theocratic totalitarianism, religious leaders are also the political leaders; in secular totalitarianism, the government imposes order via military power.

Fig. 3.2: The Political Spectrum

Features of Contemporary Democratic Systems freedom of opinion, expression, and the press freedom to organize free elections limited terms for elected officials an independent and fair court system a nonpolitical bureaucracy and defense infrastructure citizen access to the decision-making process

Fig. 3.3: Comparative Measures of Freedom

Map 3.2: Global Trends in Freedom: Political Freedom 2004

Trends in Political Systems Totalitarian regimes continue to fail as citizens challenge the right of the state to govern. Many who champion democracy truly believe that greater political freedom also leads to economic freedom and higher standards of living. Differentialism, i.e., the clash of civilizations, refers to the arguments that apparently innate and irreconcilable difference amongst cultures can trigger a backlash against Western ideas regarding political rights and civil liberties.

Political Risk Defined Political risk: the expectation, i.e., the likelihood, that the political climate in a country will change in such a way that a firm’s operating position or investment value will deteriorate MNEs do their best to effectively deal with the threat of political risk through active and/or passive approaches.

Types of Political Risk [ranging from the least Types of Political Risk [ranging from the least to the most destructive] Systemic [a change in public policy] Procedural [bureaucratic delays, labor disputes, etc.] Distributive [tax and regulatory revisions] Catastrophic [random political events]

Leading Sources of Political Risk Expropriation or nationalization International war or civil strife Unilateral breaches of contract Destructive governmental actions Harmful actions against people Restrictions on the repatriation of profits Differing points of view Discriminatory taxation policies

Legal System Defined Legal system: the mechanism for creating, interpreting, and enforcing the laws in a specified jurisdiction Generally, differences in the structure of law influence the attractiveness of a particular country as an investment site.

Types of Legal Systems Common law [based on precedent] Civil law [based upon a set of laws that comprise a code] Theocratic law [based upon religious precepts] Customary law anchors itself in the wisdom of daily experience or important traditions. A mixed legal system emerges when two or more legal systems are used within a single country.

Map 3.3: Legal Systems in the World Today

Fig. 3.4: The Diffusion of Civil Law: A Selective Profile

Legal Issues in International Business Operational concerns ease of entry and exit hiring and firing employees contract enforcement Strategic concerns product safety and liability marketplace behavior product origin legal jurisdiction arbitration [continued]

Intellectual property rights [IPRs]: ownership rights to intangible assets [copyrights, patents, trademarks, etc.] Generally, less developed countries provide less protection for IPRs than do industrialized nations. Those countries with a more individualistic orientation view IPRs as intrinsically legitimate, but those with a more collectivist outlook extol the virtues of shared ownership.

Implications/Conclusions Many countries are in a state of political transition. Presently, there is a shift away from totalitarian governments toward more democratic political ideals and freer market principles. [continued]

International business is affected by laws and regulations enacted both by countries and by international organizations. Laws may be at cross-purposes; some may diminish the ability of firms to compete with foreign competitors.