Transcript International Business

The Political and Legal
Environments
Facing Business
3-1
Political System
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Political system includes the structures,
processes, and activities by which a nation
governs itself.
Political systems can be assessed
according to two dimensions
• Degree to which they emphasize collectivism as
opposed to individualism
• Degree to which they are democratic or totalitarian
Political Participation
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Who participates in them
And
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
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
- No individual liberties
Only individuals and
private groups can
preserve personal liberties
Political Ideologies
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Most modern societies are pluralistic
politically
• Arise due to differences in
languages, ethnic background,
tribal groups or religions
The Political Spectrum
Democracy
Democratic
Government
Nondemocratic
Government
Totalitarianism
Indicators of Political Rights
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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
Indicators of Civil Liberties
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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
Democracy
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Freedom of opinion, expression, press and
organization
Elections
Limited terms for elected officials
Independent court system
• High regard for individual rights
• Respect for property
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Nonpolitical bureaucracy and defense
infrastructure
Accessibility to the decision-making
process
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Totalitarianism
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Typically theocratic or secular
Opposite end of the political spectrum
from democracy
Order is often imposed through military
power
Single party, group, or individual
monopolizes political power
Lack of constitutional guarantees
Neither recognizes nor permits opposition
Fascism
Authoritarianism (tribal, right-wing)
Communism/ socialism
3-9
States in Transition
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The political of the world has
changed radically since the late
1980’s
A wave of democratic revolutions swept
the world
The Spread of Democracy
Political Risks for International Business
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Political Risk—caused by political instability
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Promotes fear that operating position will deteriorate
Tends to be higher in totalitarian regimes
Sources of political risks
• Unstable Political System
• Political involvement of religious or military
leader
• Frequent changes in government
• Corrupt or poor leadership
• Civil disorder due to:
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Economic conditions
Human rights violations
Conflict among races, religions & etnics
Group animosity
3-11
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Can cause:
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Procurement difficulties
Work stoppages
Shipment delays
Property damage
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
Types of Political Risk
Political
Risks
Conflict and Violence
Arises from:
Reduces ability to:
 People’s resentment
toward government
 Obtain materials
and equipment
 Territorial disputes
between nations
 Manufacture and
distribute products
 Ethnic, racial or
religious disputes
 Protect employees’ lives
and firm’s assets
Terrorism and Kidnapping
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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.
Terrorism and Kidnapping
Security checklist for managers on business abroad:
 Fly non-stop 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
 Know local emergency procedures before trouble strikes
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
Policies and Laws
Policy changes restrict:
• Foreign ownership
• Investment levels
• Business activities
Local Content Requirements
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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.
Managing Political Risk
Avoidance
Influencing
Local
Politics
Risks
Information
Gathering
Adaptation
Managing Political Risk
Local equity / debt
Localization
Adaptation
Incorporate risk into
business strategies
Development assistance
Partnerships
Insurance
Managing Political Risk
Current employees
with relevant information
Information gathering
Gather data to better
predict and manage risk
Agencies specializing
in political-risk services
Managing Political Risk
Lobbying
Influencing local lawmakers
Influence local politics
Present firm’s views
on political matters
Corruption
Foreign Corrupt Practices Act
Legal Systems
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Rules - laws - that regulate
behavior
• Processes through which laws are enforced &
grievances are redressed
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Three main types of legal
systems – in use around the
world:
• Common law
• Civil law
• Theocratic law
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
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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
Contract Law
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Contract law is the body of law that enforces a
contract
• Specifies conditions under which an exchange is to
occur
• Details rights and obligations of parties
Dispute resolution is often complex
• Where to arbitrate and whose laws apply?
• Validity of contracts and decisions
Role of United Nations Convention on Contracts
for the International Sale of Goods (CIGS)
Foreign Corrupt Practices Act
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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
The act allows facilitating or expediting payments
to secure the performance of a routine
governmental action
Corruption as of 2004
Figure 2.1: Rankings of Corruption by Country
2004
Finland
New Zeland
United Kingdom
United States
France
Malaysia
Italy
Brazil
China
India
Russia
Zimbabw e
Indonesia
Nigeria
Bangladesh
0
2
4
6
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Corruption Index (10=clean; 0=totally corrupt)
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Intellectual Property Rights
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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
Protection of intellectual property rights
differs greatly from country to country
Piracy of Intellectual Property
Figure 2.2: Regional Piracy Rates for Software
Eastern Europe
Asia Pacific
Latin America
Middle East and Africa
Western Europe
North America
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20
40
60
Percentage of Software that is Pirated
80
Product Safety and Liability
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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
Criminal laws/ civil liability laws
• Civil laws call for payment and monetary damages
• Criminal liability laws result in fines or imprisonment
Other Legal Issues for International
Businesses
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Worker relations
• Health and safety standards
• Workweek
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Employment practices
Antitrust prohibitions
Environmental practices
Patents, trademarks, and intellectual
property protection
Taxes and reporting requirements
3-15
Political Strategies for International
Businesses
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Identify the exact issue
• Trade barrier?
• Environmental standards?
• Workers rights, etc?
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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
Attractiveness
Figure 2.1: Country Attractiveness
Costs
Corruption
Lack of Infrastructure
Legal Costs
Benefits
Size of Economy
Likely Economic Growth
Overall
Attractiveness
Risks
Political Risks: Social Unrest/Anti-Business Trends
Economic Risks: Economic Mismanagement
Legal Risks: Failure to Safeguard Property Rights
Ethical Behavior
Personal behavior in accordance with rules or
standards for right conduct or morality
Enron
Tyco
Ethical absolutism
Import ethics
from home
Worldcom
Parmalat (Italy)
Ethical relativism
When in Rome,
do as the Romans
Social Responsibility
Go beyond legal obligations to balance commitments to
investors, customers, communities and other companies
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Respect consumers’ rights
Guard workers’ rights
Protect the environment
Preserve employment
Encourage development
Improve health
Support education
International Relations
Favorable international
political relations foster:
 Stable business
environments
 Improved business
communications
 Efficient distribution
systems
 Prompt and equitable
dispute resolution
 Expanded
opportunities
 Diminished risk levels