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Politics and Law

CHAPTER THREE

INTERNATIONAL

BUSINESS

The Challenges of Globalization

Canadian Edition

Wild • Wild • Valladares Montemayor

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Describe each main type of political system

Identify the origins of political risk and how managers can reduce its effects

Describe each main type of legal system and the important global legal issues

Explain ethics and social responsibility and key issues facing international companies

Explain how international relations affect international business activities

Chapter Objectives

In this chapter, you will explore political and legal systems around the world.

You will also:

Learn how companies monitor and manage political risks.
Acquaint yourself with ethics and social responsibility issues in a global context.
Explore how relations among countries affects international business.

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Roles of History and Culture

Every nation’s political and legal systems are rooted in its people’s history and culture.

National history and culture are then reflected in values such as individual responsibility, law and order, free enterprise, and the role of family.

Photo: Gerry Taft, Mount Royal University

The Louvre in Paris after a rainstorm

Every nation’s political and legal systems are rooted in its people’s history and culture.

National history and culture are then reflected in values such as individual responsibility, law and order, free enterprise, and the role of family.

Other factors that help form political and legal systems include population, age and race composition, and per capita income

History and Culture

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Photo: Gerry Taft, Mount Royal University

Minsk, Belarus is the capital of the Commonwealth of Independent States (CIS). 80% of the city was destroyed during World War two, and then rebuilt by Stalin.

Minsk is a beautiful city with a wonderful riverside park in the center. While young people seem happy to have their picture taken, the elderly who lived through Communism, often hide behind trees once they see a camera.

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Political Ideologies

Both private and public

groups need to balance

each other’s power

Every aspect of

people’s lives must be

controlled to preserve order

Only individuals and

private groups can

preserve personal liberties

Totalitarianism

Anarchism

Pluralism

As shown here, we can arrange the world’s three political ideologies on a horizontal scale.

At one extreme is totalitarianism—the belief that every aspect of people’s lives must be controlled to preserve order.
At the other extreme is anarchism—the belief that only individuals and private groups can preserve political liberties.
In-between lies pluralism—the belief that both private and public groups belong in politics.

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Imposed

authority

Lack of

constitutional

guarantees

Restricted

participation

Totalitarianism

Leaders govern without people’s support
Government controls much of people’s lives
Leaders do not tolerate opposing viewpoints

In totalitarian governments, individuals govern without the support of the people, tightly control people’s lives, and do not tolerate opposing viewpoints.

Totalitarian governments tend to share three features:

Authority imposed on people
A lack of constitutional guarantees
Restricted political participation
Communism
Gov’t control
Theocratic secular of all aspects of people’s lives

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Forms of Totalitarianism

Theocratic totalitarianism

(totalitarian religious leadership)

Secular totalitarianism

(military and bureaucratic leadership)

Tribal totalitarianism

Communist totalitarianism

Right-wing totalitarianism

The two major types of totalitarianism are:

Theocratic totalitarianism—which is controlled by totalitarian religious leaders.
Secular totalitarianism—in which leaders rely on military and bureaucratic power for control.
There are three sub-types of secular totalitarianism:
Communist totalitarianism (or simply communism) argues that social and economic equality can only be obtained by establishing an all-powerful Communist party and by granting the government ownership and control over all types of economic activity.
Tribal totalitarianism is a system whereby one ethnic group imposes its will on other ethnic groups within a nation.
Right-wing totalitarianism is a system whereby government endorses private ownership of property and a market-based economy, but grants few (if any) political freedoms.

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Business in Totalitarian Nations

Risk Factors

Arbitrary nature of business can mean that laws are vague or do not exist

Bureaucrats may interpret laws however they wish

Doing business in totalitarian countries can be a risky venture because laws can be vague or nonexistent and powerful officials can interpret laws at will.

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Democracy

Freedom of expression

Periodic elections

Full civil, property rights

Minority rights

Nonpolitical bureaucracies

Photo: Gerry Taft, Mount Royal University

An anti-Nazi demonstration in Berlin, Germany

A democracy is a political system in which government leaders are elected directly by the wide participation of the people or their representatives.
In representative democracies, citizens elect individuals from their groups to represent their political views.
Representative democracies strive to provide five freedoms: freedom of expression; periodic elections; full civil and property rights; minority rights; and nonpolitical bureaucracies.
Democracies tend to maintain stable business environments through laws protecting individual property rights.

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Discussion Question

What are the three main features of totalitarianism and the five freedoms that democracies strive to provide?

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Answer to Discussion Question

Totalitarian governments tend to share: imposed authority, a lack of constitutional guarantees, and restricted political participation.
Democracies strive to provide: freedom of expression, periodic elections, full civil and property rights, minority rights, and nonpolitical bureaucracies.

Answer:

Totalitarian governments tend to share: imposed authority, a lack of constitutional guarantees, and restricted political participation.
Democracies strive to provide: freedom of expression, periodic elections, full civil and property rights, minority rights, and nonpolitical bureaucracies.

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Types of Political Risk

Conflict and violence

Policy changes

Terrorism and kidnapping

Local content requirements

Property seizure

In the broadest sense, we speak of political risk as belonging to one of two types.

Macro risk threatens all companies regardless of industry and affects both domestic and non-domestic businesses.
Micro risk threatens companies within a particular industry or even a segment of an industry.

Five events that cause political risk are: conflict and violence; terrorism and kidnapping; property seizure; policy changes law revisims ; and local content requirements.

Let’s now examine each of these events.

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Arises from:

People’s resentment

toward government

Territorial disputes

between nations

Ethnic, racial, or

religious disputes

Reduces ability to:

Obtain materials

and equipment

Manufacture and

distribute products

Protect employees’ lives

and firm’s assets

Conflict and Violence

Local conflict and violence can arise from: resentment toward the government; territorial disputes; and ethnic, racial, and religious disputes.
They hinder the procurement of materials and equipment, impair manufacturing and distribution activities, and threaten the safety of personnel.

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Fly nonstop 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

Security checklist for managers on business abroad:

Terrorism and Kidnapping

Terrorism and kidnapping are used to make political statements through fear and destruction.
Shown here is a brief checklist for managers to follow while abroad on business.

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Property Seizure

Confiscation

Forced transfer of assets from a company to the government without compensation

Expropriation

Forced transfer of assets from a company to the government with compensation

Nationalization

Forced asset transfer to the government of an entire industry

Photo: Gerry Taft, Mount Royal University

Warships and Submarines on the Neva River in St. Petersburg, Russia

Government seizures of property can take three forms:

Confiscation is the forced transfer of assets to the government without compensation.
Expropriation is the transfer of assets to the government with compensation. No framework for legal appeal exists and compensation is often far below market value.
Nationalization involves government takeover of an entire industry and is more common than either confiscation or expropriation.

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Policies and Laws

Policy changes restrict:

Foreign ownership
Investment levels
Business activities

Local content requirements:

Specify the portion

of a good or service to be supplied

by local firms

Photo: Gerry Taft, Mount Royal University

The packaging or contents of these Russian Salt and Pepper

packets may be subject to local content requirements. Note how the pictures on the packaging indicate the contents.

Policy changes arise from newly empowered political parties, pressure from special interests, and civil or social unrest.

One such policy tool restricts ownership to domestic companies or limits ownership by non-domestic firms to a minority stake.
Other policies restrict certain cross-border investments.

Local content requirements specify an amount of a product to be supplied locally.

These are intended to foster local business activity and create jobs by forcing companies to use local raw materials, procure parts from local suppliers, or employ local workers.
But they may force a firm to take on poorly trained or excess workers, increase costs due to more expensive local materials, and reduce quality if local materials are inferior.

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Managing Political Risk I

Adaptation

Incorporate risk into

business strategies

Localization

Development assistance

Partnerships

Insurance

One way companies try to manage political risk is through adaptation—which incorporates risk into business strategies.

Four adaptation strategies are:

Forming informal or formal partnerships to leverage expansion plans.
Localizing (or modifying) operations, the product mix, or some other element to suit local tastes and culture.
Offering development assistance to help the host country improve its distribution and communications networks and improve the quality of life for locals.
Obtaining insurance to protect the company against losses and to obtain project financing.

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Managing Political Risk II

Information gathering

Gather data to better

predict and manage risk

Agencies specializing

in political-risk services

Current employees

with relevant information

A second way companies try to manage political risk is by gathering information to improve forecasts.

Sources of information include:

Current employees who worked in the country and have valuable contacts and knowledge.
Agencies specializing in political-risk services, including banks, political consultants, and risk-assessment services.

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Managing Political Risk III

Influence local politics

Present firm’s views

on political matters

Corruption

Foreign Corrupt Practices Act

Lobbying

Influencing local lawmakers

A third way companies try to manage political risk is through political influence—which involves dealing with local lawmakers and politicians directly or through lobbyists.

In 2013, Canada significantly strengthened its Corruption of Foreign Public Officials Act (CFPOA). Canadian companies and individuals who are involved in the bribery of foreign public officials will be subject to Canadian law regardless of where the acts constituting the offence took place, and even if there is no connection with Canada other than their nationality. The exception allowing “facilitation payments” (small payments made to an official for the purpose of securing the performance of routine administrative acts that are part of the official’s duties or functions) will be eliminated at a future date to be determined by Cabinet order.

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Think – Pair - Share

What are intellectual property rights and what is their significance to business?

Photo: Gerry Taft, Mount Royal University

On this street in Hong Kong you could buy a counterfeit version of almost any item imaginable.

Slide 20 is the first “Think-Pair-Share” in this chapter. These slides are intended to stimulate discussion between students. The activity requires students to consider the question individually, and then share their thoughts with one classmate or a small group. The goals of these slides are to 1) improve students’ conceptual understanding of the material, 2) hone critical thinking skills, and 3) improve problem solving.

Q What are intellectual property rights and what is their significance to business?

Answer:

Intellectual property rights are legal rights to resources that result from intellectual abilities and any income these resources generate. Like other types of property, intellectual property can be traded, sold, and licensed in return for fees and/or royalty payments. Intellectual property laws are designed to compensate people whose property rights are violated.

You may find it interesting to examine the trademark disputes between the American “King of Beers” Budweiser, and the Czech “Beer of Kings” Budweiser.

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Answer to Discussion Question

Intellectual property rights are legal rights to resources that result from intellectual abilities and any income these resources generate. Like other types of property, intellectual property can be traded, sold, and licensed in return for fees and/or royalty payments. Intellectual property laws are designed to compensate people whose property rights are violated.

Answer:

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Discussion Question

Incorporating political risk into business strategies by modifying operations, the product mix, or some other business element is called ____________.

a. Specialization

b. Globalization

c. Localization

Incorporating political risk into business strategies by modifying operations, the product mix, or some other business element is called ____________.

a. Specialization

b. Globalization

c. Localization

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Answer to Discussion Question

Incorporating political risk into business strategies by modifying operations, the product mix, or some other business element is called ____________.

a. Specialization

b. Globalization

c. Localization

The correct answer is c. Localization

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Common Law

Usage

How laws are applied

Tradition

Nation’s legal history

Precedent

Past cases before the courts

The common law system originated in England ten centuries ago and is based on:

Tradition, or a nation’s legal history.
Precedent, or past cases that have come before the courts.
And usage, or how laws are applied in specific situations.

Common law is flexible because it takes into account particular situations and circumstances.

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Civil Law

Defines all obligations, responsibilities, and privileges

Dates to Roman times in the fifth century B.C.

Rules and statutes constitute a legal code

Civil law can be traced to Rome in the fifth century B.C. and is the most common legal tradition.

It is based on a detailed set of written rules and statutes that constitute a legal code.
It can be less adversarial than common law because the legal code defines all obligations, responsibilities, and privileges of the parties to a contract.

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Theocratic Law

Legal tradition based on religious teachings

Islamic law Jewish law Hindu law

Firms operating in countries with theocratic legal systems must be sensitive to local values and beliefs.
They must evaluate their activities, including hiring practices and investment policies, to ensure compliance with the law, local values, and beliefs.
Islamic law is the most widely practiced theocratic legal system today.

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Global Legal Issues I

Intellectual property

Result of intellectual talent and abilities
Piracy/counterfeits a serious problem

Patent

Excludes all but the inventor from making, using, or selling the invention (WTO = 20 years)

Trademark

Words or symbols that distinguish a product and its manufacturer ("Coca-Cola")

Freedom of creator to publish or dispose of original works as they choose ("Happy Birthday to You")

Photo: Gerry Taft, Mount Royal University

Global brands on display at a cafe in Warsaw, Poland

Intellectual property is an enormously important topic for global business today.

Intellectual property results from intellectual talent and abilities to produce things such as graphic designs, novels, computer software, machine-tool designs, and secret formulas.
A patent is a right granted to the inventor of a product or process that excludes others from making, using, or selling the invention.
Trademarks are words or symbols that distinguish a product and its manufacturer. Trademark protection lasts indefinitely, provided the word or symbol continues to be distinctive.
Copyrights give creators of original works the freedom to publish or dispose of them as they choose.
A copyright holder can reproduce the work, derive new works from it, sell or distribute it, perform it, and display it publicly.

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Business Software Piracy

Source: Based on the Seventh Annual BSA and IDC Global Software Piracy Study (Washington, D.C.; Business Software Alliance, May 2010), Table 3, pp. 14–15, (www.bsa.org/globalstudy).

This figure illustrates the lax nature of intellectual property rights laws in certain nations.
Each year, business software piracy costs software makers around $51 billion globally.

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Global Legal Issues II

Standardization
Interpreting and applying laws uniformly
Product safety and liability
Responsibility for damage, injury, or death
Taxation
Income, sales, consumption, and VAT
Antitrust (antimonopoly) laws
Prevent market sharing, price fixing, and unfair advantage

Standardization refers to uniformity in interpreting and applying laws across countries, not to the standardizing of entire legal systems.
Developed nations have the toughest product liability laws, whereas emerging markets tend to have weaker laws.
Consumption taxes help pay for the consequences of using particular products and can be used to make imports more expensive.
A value-added tax, which is common across Europe, is levied on each party that adds value to a product throughout its production and distribution.
Antitrust (antimonopoly) laws help ensure availability of a wide variety of products at fair prices.

Property rights
Patents trademarks
copyright

Think - Pair - Share

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Photo: Halia Valladares Montemayor, Mount Royal University

Selling, advertising or importing this product in Canada could result in a fine of up to $100,000!

Why is the product in this picture illegal in Canada, but legal in The United States and Mexico?

Why is it necessary for international business people to fully understand and comply with product safety and liability laws in every country where they do business?

Slide 30 is the second “Think-Pair-Share” in this chapter. These slides are intended to stimulate discussion between students. The activity requires students to consider the question individually, and then share their thoughts with one classmate or a small group. The goals of these slides are to 1) improve students’ conceptual understanding of the material, 2) hone critical thinking skills, and 3) improve problem solving.

Why is the product in this picture illegal in Canada, but legal in The United States and Mexico?

Why is it necessary for international business people to fully understand and comply with product safety and liability laws in every country where they do business?

A: Product safety laws in most countries set standards that manufactured products must meet.

Product liability holds manufacturers, sellers, individuals, and others responsible for damage, injury, or death caused by defective products. Injured parties can sue for monetary compensation through civil lawsuits and for fines or imprisonment through criminal lawsuits.

In Canada, product safety and liability are regulated by the Canada Consumer Product Safety Act (CCPSA), which is administered by Health Canada. Its purpose is to protect the public by addressing and preventing dangers to human health or safety posed by consumer products in Canada.

For example, the following products are banned in Canada: baby walkers, infant self-feeding devices, jequirity beans, lawn darts with elongated tips, and polycarbonate baby bottles containing BPA. For a full list of banned products, consult the Health Canada site at

www.hc-sc.gc.ca . Caution is advised for consumers purchasing from foreign online sites, as it is the consumer’s responsibility to make sure the product is not banned in Canada. Restricted items will be seized by customs.

Answer to Discussion Question

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The following products are banned in Canada: baby walkers, infant self-feeding devices, jequirity beans, lawn darts with elongated tips, and polycarbonate baby bottles containing

BPA.

Product safety laws in most countries set standards that manufactured products must meet.

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International Relations

Favorable international political relations foster:

Stable business environments

Improved business communications

Efficient distribution systems

Expanded

opportunities

Diminished risk levels

Prompt and

equitable dispute

resolution

Photo: Gerry Taft, Mount Royal University

A Canadian flag over a building in

Ulaan Bator, Mongolia.

Canada is the second largest foreign investor in Mongolia.

Favorable international political relations foster stable business environments, improved business communications, efficient distribution systems, expanded business opportunities, and lower risk levels.
These benefits, however, rest on a strong legal system that can resolve disputes promptly and equitably.
The United Nations and its many agencies are part of that legal system.
The UN’s Conference on Trade and Development has a very broad mandate in facilitating worldwide trade and economic development.