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International Business

Sixteenth Edition

Chapter 3

The Political and Legal Environments Facing Business

Learning Objectives

3-1 Explain how politics and laws influence business

3-2 Appraise the principles and practices of the political environment

3-3 Discuss the contemporary state of political freedom 3-4 Interpret political risk

3-5 Appraise the principles and practices of the legal environment

3-6 Describe key legal issues facing international companies

3-7 Relate the ideas of politics, law, and the business environment

Learning Objectives for Chapter Three.

Political and Legal Forces

Objective 3-1

Figure 3.1 Political and Legal Factors Influencing IB Operations

Learning Objective 1: Explain how politics and laws influence business

This figure shows how political and legal forces affect IB.

Political Risk Map

Objective 3-2

Map 3.1 Map of Political Risk, 2015

Source: Based on Marsh Political Risk Map 2015; and AON Political Risk, http://www.aon.com/2016politicalriskmap

Learning Objective 2: Appraise the principles and practices of the political environment.

This map shows the level of political risk. It is important when engaging in IB to understand the political implications of the country in which you wish to work with.

Political Definitions

Objective 3-2

Political System

Political Freedom

Individualism

Collectivism

Learning Objective 2: Appraise the principles and practices of the political environment.

political system—namely, the structural dimensions and power dynamics of the government that (1) specify institutions, organizations, and interest groups and (2) define the norms and rules that govern political activities. The mission of a political system is clear-cut: integrate different groups into a functioning, self-governing society.

The doctrine of individualism emphasizes the primacy of individual freedom, self-expression, and personal independence The doctrine of collectivism emphasizes the primacy of the collective (e.g., a group, party, community, class, society, or nation) over the interests of the individual.

Political freedom is 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 expression. In a democracy, MNEs have the freedom to invest and operate based on economic, not political, standards. Managers and consumers are free to do as they see fit in a business environment that promotes commerce and encourages trade. The signaling devices of market activities, not bureaucratic regulation, organize resource flows.

The doctrine of individualism emphasizes the primacy of individual freedom, self-expression, and personal independence (think of the stipulation in the U.S. Declaration of Independence that we all have “certain inalienable Rights, that among these are Life, Liberty and the pursuit of Happiness”).

The doctrine of collectivism emphasizes the primacy of the collective (e.g., a group, party, community, class, society, or nation) over the interests of the individual. No matter the importance of those who compose it, the whole of the collective trumps the sum of its individual parts.

A nation’s orientation toward individualism or collectivism anchors its political system and, hence, its predominant political ideology

The Political Spectrum

Objective 3-2

Figure 3.2 The Political Spectrum

Learning Objective 2: Appraise the principles and practices of the political environment.

In practice, purely democratic and totalitarian systems are exceptions. Looking around the world, one sees many variations. For example, democratic systems range from radical on one side (advocates of extreme political reform) to reactionary (advocates of a return to past conditions). Likewise, totalitarian systems emphasize different degrees of state control. Fascism aims to control people’s minds, souls, and daily existence, whereas authoritarianism confines itself to political control of the state.

Types of Governments

Objective 3-2

Democracy

Totalitarian

Learning Objective 2: Appraise the principles and practices of the political environment.

A democracy is a government “of the people, by the people, for the people.” Modern-day democracies translate this ideology into the principles that all citizens are politically equal, entitled to freedom of thought, opinion, belief, speech, and association, and command sovereign power over public officials.

A totalitarian system subordinates the interests of the individual to that of the collective. An agent in whatever form, such as an individual, a committee, an assembly, a junta, or a party, monopolizes political power and uses it to regulate many, if not all, aspects of public and private life.

Democracy vs. Totalitarian

Objective 3-2

Table 3.1 Prominent Types of Democracies

Table 3.2 Prominent Types of Totalitarianism

Learning Objective 2: Appraise the principles and practices of the political environment.

These table show the different types of democracies and totalitarian governments.

The State of Political Freedom

Objective 3-3

Map 3.2 Map of Freedom

Source: Freedom House, “Map of Freedom 2015,” at https://freedomhouse.org/report/freedom-world/freedom-world-2015. Used by permission of Freedom House.

Learning Objective 3-3: Discuss the contemporary state of political freedom.

This table shows political freedom.

A "free” country exhibits open political competition, respect for civil liberties, independent civic life, and independent media. There are inalienable freedoms of expression, assembly, association, education, and religion. Examples include Australia, Brazil, India, and the United States.

A “partly free” country exhibits limited political rights and civil liberties, corruption, weak rule of law, ethnic and religious strife, unfair elections, and censorship. Often, democracy is a convenient slogan for the single party that dominates within a façade of regulated pluralism. Examples include Guatemala, Pakistan, and Tanzania.

A “not free” country has few to no political rights and civil liberties. The government allows minimal to no exercise of personal choice, relies on the rule of man as the basis of law, constrains religious and social freedoms, and controls a large share, if not all, of business activity. Examples include China, Russia, Saudi Arabia, and Iran.

Change in the State of Political Freedom

Objective 3-3

More Democracy world wide

“Third Wave of Democratization”

Reasons for this shift

Learning Objective 3-3: Discuss the contemporary state of political freedom.

The second half of the twentieth century saw the steady diffusion of democracy worldwide. Between 1950 and 2014, the number of electoral democracies grew from 22 to 120 countries. Many had been totalitarian states of some form, but had begun developing democratic governance.

This shift signified the so-called Third Wave of Democratization, a global movement that expanded individual freedoms and civil liberties

Reasons for this shift: Communism toppled due to citizens concerns about declining standards of life, technology/ease of communications, great economic growth

Current Political Systems

Objective 3-3

Table 3.3 Types and Characteristics of Political Systems in the World

Learning Objective 3-3: Discuss the contemporary state of political freedom.

The table shows the definitions and characteristics of current political systems.

Change in the State of Political Freedom

Objective 3-3

What is political risk?

Why discuss political risk?

Learning Objective 3-4: Interpret political risk.

Political risk is the risk that political decisions, events, or conditions change a country’s business environment of the value of their investment, or threaten the sustainability of their operation.

No matter whether it operates in Canada, Cambodia, Cameroon, or Chad, for instance, an MNE faces the risk that the political events in the host country will adversely affect its operational objectives, strategic goals, and profitability.

Types of Political Risk

Objective 3-4

Figure 3.4 Classes and Characteristics of Political Risk

Learning Objective 3-4: Interpret political risk.

This table shows the various political risks classifications, types, and outcomes.

Systemic political risks, by influencing the macro business environment, affect the operation of all firms.

Procedural political risk institutes impediments that constrain the flexibility of local operations.

Distributive political risks gradually eliminate the local property rights of foreign companies.

Catastrophic political risk devastates the business environment for all companies.

Legal Systems and Components

Objective 3-5

What is the legal System?

Components of a legal System

Constitutional Law

Criminal Law

Civil and Commercial Law

Learning Objective 5: Appraise the principles and practices of the legal environment.

The legal system is the mechanism for conceiving, stipulating, interpreting, and enforcing the laws in a formal jurisdiction.

Modern legal systems evidence three components:

Constitutional Law: translates the country’s constitution into an open and just legal system, setting the framework for government and defining the authority and procedure of political bodies to establish laws.

Criminal Law: safeguards society by specifying what conduct is criminal, and prescribing punishment to those who breach those standards.

Civil and Commercial Law: which ensure fairness and efficiency in business transactions by stipulating private rights and specific remedies in order to regulate conduct between individuals and/or organizations.

Types of Legal Systems

Objective 3-5

Map 3.4 The Wide World of Legal Systems

Source: University of Ottawa, “World Legal Systems,” retrieved February 15, 2016, from http://www.juriglobe.ca/eng/index.php. Used by permission.

Learning Objective 5: Appraise the principles and practices of the legal environment.

This map shows the various types of legal systems. Let’s discuss each.

A common law system relies on tradition, judge-made precedent, and usage. It respects established case law in resolving disputes.

A civil law system relies on the systematic codification of accessible, detailed laws. It assigns political officials, rather than government-employed judges, the responsibility to translate legal principles into a compendium of regulatory statutes.

A theocratic law system relies on religious doctrine, precepts, and beliefs.

A customary law system reflects the wisdom of daily experience or, more formally, enduring spiritual legacies and time-honored philosophical outlooks.

A mixed legal system results when a nation uses two or more of the preceding types.

The Basis of Rule

Objective 3-5

The Rule of Man

The Rule of Law

Learning Objective 5: Appraise the principles and practices of the legal environment.

Once relegated to the periphery of the global economy, emerging markets steadily command center stage. Their expanding economies increasingly frame interpretation of legal trends. Managers assess the prevailing philosophical basis of law in order to understand how local officials will regulate their activities.

The rule of man holds that ultimate authority resides in a person whose word and whim, no matter how unfair or unjust, is law.

The rule of law holds that no one, whether a public official or private citizen, is above the law.

Two Key Legal Concerns Facing IB

Objective 3-6

Operational

Strategic

Learning Objective 6: Describe key legal issues facing international companies.

Operational concerns include:

Process of starting a business involves activities such as registering its name, adopting the appropriate tax structure, obtaining licenses and permits, arranging credit, and securing insurance.

Making and enforcing contracts.

Hiring and firing rules.

Ease of closing a business or going out of business.

Strategic concerns include:

Product regulation laws.

Product safety laws.

Legal jurisdiction.

Intellectual property.

Ranking of Doing Business in Various Countries

Objective 3-7

Table 3.5 Easy Here, Hard There: Doing Business In Various Countries

Source: Doing Business 2016. The World Bank. Retrieved May 15, 2016.

Learning Objective 7: Relate the ideas of politics, law, and the business environment.

This table describes the ease of doing business in a variety of countries. The World Bank ranks 185 countries on their respective ease of doing business—the higher the score, the more favorable the business environment.

Activity Minute:

Ask students to break into team, or ask the entire class, “Do you see a relationship between nation’s incomes and its scope of regulation? If so, why is this do you think?