Chapter 3: The Political And Legal Environment Facing Business

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The political environment:

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Why is it important for managers?

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Studying political and legal environment help them to adjust the company activities to local circumstances.

Political and legal systems converge and vary across countries in terms of guiding principles and practical routines.

The goal of a political system is integrating the diverse elements to create a self-sustaining and self-governing society.

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Two standards anchor assessment of a political system:

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the degree to which it emphasizes individualism vs collectivism and the degree to which it is democratic vs totalitarian.

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Individualism vs Collectivism

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Individualism:

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endorses the primacy of personal freedoms in the political, economic, and cultural realms. It champions the interests of the individual over the society. Political officials and agencies play a limited role. E.g Australia, Canada, US..
Business implication>> each person has the right to make economic decisions free of rules and regulations. The government should not interfere in business affairs.

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Collectivism:

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holds that the needs of society take precedence over the needs of the individual. Collectivism encourages state intervention to improve the welfare of the group at the expense of the individual. Political officials and agencies play an extensive role. E.g Argentina, Japan, South Korea, Mexico...

Business implication >> Political systems regulates the market to ensure that business benefit the society. Promote social equality, income equality, labor rights.

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Political Ideology

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The political ideology stipulates how society function and outlines the methods by which it will do so.

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2 main political ideology:

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democracy and totalitarianism. They differ in the degree of political freedom.

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Democracy:

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champions the power of the many over the few. A democratic government protects personal and political rights, civil liberties, fair and free elections and independent courts of law. Lincoln defines democracy as a«government of the people, by the people, for the people»

Democracy and individualism are intrinsically related and mutually reinforcing.

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Types of democracy:

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Liberal, Radical, Conservative, and Reactionary

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Business implication:

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MNE can operate and invest based on economic not political standards. It creates dynamic business environment, that promote commerce, trade and exchange.

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Totalitarianism:

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champions the power of the few over the many. The government exercises control over many aspects of life, the individual is subordinated to the state and opposing political and cultural expression is suppressed.

Totalitarianism and Collectivism are intrinsically related.

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Types of totalitarianism:

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Authoritarian, fascist, communist, dictatorship

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Business implication:

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State favour only local company by providing them financial assistance, relaxed regulation, and special tax programs. It typically hits foreign MNEs.

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The standard of freedom:

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Political freedom:

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measures the degree to which fair and competitive elections occur, the extent to which individual and group freedoms are guaranteed, the legitimacy ascribed to the rule of law and the existence of freedom of the press.

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Freedom classifies 3 types of political systems:

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-free : US, Brazil, India... > freedom of expression, education, association, and religion
-partly free: Pakistan, Guatemala...> limited political rights, corruption, weak rule of law
-not free: China, Russia, Vietnam, Saudi Arabia > no political rights, rule of man

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Trends in Political Ideologies

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The third wave of democratization:

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since 1974, doubling the numbers of democracy (e.g collapse of the Berlin Wall, collapse of the communist bloc, end of cold war) >> led to the acceleration of international business

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Powering the rise of democracy over the past three decades has been:

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-failure of totalitarian regimes to deliver prosperity
-improving communication technology
-economic dividends of political freedoms (GDP rose 7 times higher for the free countries)

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Democracy: recession and retreat:

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Recent data on the spread if democracy indicate it is in retreat over the past 5 years.

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Powering the resurgence of totalitarianism is

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- uncertainty of the relationship between economic development and democracy
-inconsistencies
-economic problems (global financial crisis, slow growth, high unemployment)
-standards of democracy

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Political Risks:

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the likelihood that political decisions, events, or conditions will affect a country’s business environment in ways that cost investors some of the value of their investments, force them to accept lower than expected rates of return, and threatens the sustainability of local activities.

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Classifying risks (from least to most disruptive):

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1) systematic
2) procedural
3) distributive
4) catastrophic

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1) systematic

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change of leadership of the country, difficulties to arrange a loan...

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2) procedural

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frictions that slow transactions, tax discrimination, restriction on profit...

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3) distributive

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kidnapping of employees, terrorist actions, expropriation or nationalization

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4) catastrophic

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civil strife, insurrection, war

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The legal Environment:

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legal system:

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it specifies the rules that regulate behaviour, the processes that enforce the laws of a country and the procedure used to resolve grievances.

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Modern legal system:

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share a system of constitutional law that preserves an open and just political order, a system of criminal law that safeguards the social order, and a system of civil and commercial laws that promote fairness.

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Types of legal system:

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1) Common law system
2) Civil law system
3) Theocratic law system
4) customary law system
5) mixed legal system

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1) Common law system

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based on tradition, judge made precedent, custom, usage, and interpretation by the courts. It respects established case law in resolving disputes. Canada, US, England, Australia...

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2) Civil law system

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relies on a systematic collection of codes and statues that judges must follow. most widespread in the world: Germany, France, Mexico, Japan

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3) Theocratic law system

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based on religious concepts. Middle East and Northern Africa

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4) customary law system

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follows the wisdom of daily experience. It is based on norms of behaviours practiced over a long period. Africa

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5) mixed legal system

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combines elements of all systems. Nigeria, Pakistan, Indonesia,

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Trends in legal systems:

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Thanks to the third wave of democratization, the legal system in many countries became more transparent, courts became more impartial and officials became more accountable.

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The rule of law:

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endorses systematic and objective laws applied by public officials who are held accountable for their just administration. No individual is above laws. Laws are clear, publicized and protect fundamental human rights.

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The rule of man:

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holds that the ruler, whatever from, commands authority that is not bound by law. No actions are regulated or restricted by any constitution>> instrument for totalitarianism.

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Implication for managers:

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Uncertainty about the basis of law in a particular country challenge decision making.

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Legal issues in International Business:

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Differences on political ideologies often pose operating problems that include

1) starting a business (obtaining credits, securing insurance, licenses...) India for example requires 13 different procedures spanning 694 days whereas in Australia it is very straight forward and can be done in 1 day.

2) entering and enforcing contracts between buyer and seller: countries using common law system encourage precise and detailed contracts whereas those with a civil law system encourage less specific ones.

3) hiring and firing workers: difference in work hours, minimum wages, and benefits

4) closing down the business: reporting the sales of assets, termination of retirement plans

We see an inverse relationship between a nation’s wealth and its tendency to regulate business activity. Overall richer countries regulate less, and poorer countries regulate more.

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Strategic concerns:

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Primary legal issues in international business include:

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-rule of origin

-product safety and liability customizing your product to comply with local standards

-marketing practice National laws stipulate permissible practises: e.g French Gov forbids transport trucks on Sunday, shops are allowed to hold sales only twice a year on specific dates.

- jurisdiction Countries stipulate the criteria for litigation when agents form different countries are unable to resolve a dispute

- intellectual property protection.

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Intellectual property:

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is the creative ideas, innovative expertise and intangible insights that give an individual, company or country a competitive advantage.
Its protection within a country is moderated by


- its legal legacies The predominant share of counterfeit products is made in countries in which rule of man prevails

- economic development generally, poorer countries protect intellectual property less vigilantly than do wealthier countries.

- cultural orientation Cultural attitudes influence the protection of intellectual rights. Individualist societies are more vigilant than collectivist societies