POLITICAL, LEGAL, AND ETHICAL ASPECTS OF BUSINESS IN
INTERNATIONAL BUSINESS
Companies involved in international business activities must understand the
different types of political systems and how each of them works. This does not only
apply to brick-and-mortar traditional businesses, but also includes internet-based
companies and other types of service companies.
A. Types of Political Systems
The political system includes the structure, processes and activities that govern
the running of a country. A country's political system is closely related to the history and
culture of the people. Various factors such as population, age and racial composition,
and per capita income can affect a country's political system. There are three types of
political ideologies that can be sorted in a horizontal line. At one extreme point there is
anarchism and at the other extreme point is totalitarianism.
Anarchism is a belief that certain individuals or groups cannot control the political
activities of a country. Proponents of this ideology believe that society does not need
and want the government because it can limit personal freedom. Meanwhile, the
ideology of totalitarianism is the belief that every aspect of a country's life must be
supervised by the political system. This ideology does not assume the existence of
individual freedom. The political system of totalitarianism includes communism and
fascism. Between these two extremes is the ideology of pluralism, which is the belief
that both public and private groups play an important role in the political activities of a
country. The following is discussed in more depth each political system.
1. Totalitarianism
In a totalitarian political system, the government has the freedom to regulate the
life of the state (society) without the support or supervision of other parties. South
Korea is an example of a country that adheres to a totalitarian system. Governments
that adhere to this political system generally have three main characteristics. First,
there is an imposed authority. A certain individual or group forms a political system
without the explicit or implicit consent of others. Leaders usually gain power through
military force or unfair selection. Second, the totalitarian system rejects the existence
of constitutional guarantees (lack of constitutional guarantees). In other words, this
system restricts or rejects the concepts of freedom of expression, periodic elections,
civil rights and minority rights. Third, political representation is limited to parties
sympathetic to the government. The political system of totalitarianism can be divided
into two types, namely theocratic totalitarianism and secular totalitarianism.
The theocratic totalitarianism system is a totalitarian political system led by
religious leaders. Meanwhile, in secular totalitarianism, political leaders depend on
military and bureaucratic power. The political system of secular totalitarianism can
be divided into three forms, namely communist, tribal, and right-wing. Communism
is the belief that social and economic justice can be achieved through the
establishment of a communist party that has full power. In addition, this social justice
can also be achieved by implementing the socialist system, namely the government
regulates and holds full ownership of all economic activities carried out. The main
difference between communism and socialism is seen in the communists' belief that
to gain control over resources and to destroy the opposition is done through rebellion.
The socialists did not believe in this form of rebellion. Thus, communists are also
socialists, but socialists are not necessarily communists. Furthermore, in the form of
tribal totalitarianism, certain ethnic groups impose their will on other groups.
Meanwhile, in right-wing totalitarianism, the government holds ownership of private
property, but still provides political freedom.
There are various advantages and disadvantages for international companies
when doing business in totalitarian countries. One of the advantages is that
international companies do not need to worry about the opposition who refuse to
present their business. Meanwhile, one of the main drawbacks is that there is a
possibility that the company will have to pay a certain amount of money (bribery) to
government employees. Doing business operations in totalitarian countries also
carries a high risk. Companies that do business in this country are sometimes
considered to have no concern for people who are oppressed by government policies.
This requires business executives to choose between refusing to invest in a
totalitarian country (losing business opportunities) or continuing to invest and bear
the burden of potentially damaging the company's image.
2. Democracy
Democracy is a political system when the government is directly elected by the
people or their representatives. This democratic system is different from the
totalitarian system in almost all aspects. In this political system, there is what is
known as representative democracy, which is a democratic system in which the
people elect certain individuals from their group to represent their voting rights. This
representative democracy system has several characteristics such as freedom of
expression, periodic elections, property rights, human rights, rights for minorities,
and no non-political bureaucracy. Although it has the same principles, this
democratic system can be divided into several different practices such as
parliamentary democracy adopted by the United Kingdom. A democratic system
maintains a stable business environment through policies and regulations that protect
individual property rights. In theory, businesses have a greater chance of success
when the private sector includes independently owned and profit-oriented
companies.
B. Political Risks and Their Impact in International Business
All companies that do business, both nationally and internationally, are always faced
with political risks. Political risk can be interpreted as the possibility of political changes
that can have a negative impact on business activities carried out. Political risks in
different countries have different impacts for international companies. This risk can be
in the form of threats from the exporter market, or production facilities owned by foreign
companies. A strong understanding of local values, customs and traditions can help
reduce the level of exposure of companies to political risks. The following is an
explanation of some of the forms and sources of political risk and its impact on
international business.
1. Conflict and Violence
Various local conflicts can discourage international companies from investing in
a country. Various disruptions and threats of violence can hinder a company's ability
to manufacture and distribute their products. Not only that, various other activities
such as the acquisition of raw materials and employee recruitment will also be
hampered. Open conflicts can threaten a company's physical assets such as office
buildings and factories as well as the safety of employees. This conflict also damages
the economic development of a country.
2. Terrorism and Kidnapping
Acts of terrorism are aimed at making political statements. This action occurred
because of community groups who were dissatisfied with the existing political and
economic conditions. This prompted them to devise tactics of rebellion in order to
force change through destruction. This terrorist group carried out kidnappings to
fund their activities. Executives from international companies are generally targeted
for kidnapping because they are more likely to pay ransoms. Some companies even
purchase kidnapping and forfeiture insurance premiums to mitigate the impact of
these risks.
3. Confiscation of Property
The government sometimes confiscates assets and property from companies that
conduct business activities in their country. These confiscated assets can be grouped
into three categories. The first category is confiscation, which is the process of taking
and transferring company assets to the government without being compensated.
However, if the government confiscates assets and provides compensation, it is
categorized as expropriation. The amount of this compensation is determined by the
government and generally has a lower value than the market price. While the third
category is known as nationalization, which is the government taking over all
industries in a country. In the short term, these three forms of property confiscation
can help the economy. However, in the long run, foreign investors will tend to refuse
to invest in the country, slowing down its economic growth.
4. Policy Changes
Changes in political policy can be caused by a variety of influences, including
ideas embraced by new political parties, political pressure coming from certain
stakeholders, and social unrest. In addition, certain policies may restrict company
ownership for foreign investors. This results in a much larger percentage of
ownership of domestic companies compared to foreign companies. However, there
are other forms of policy changes that have a positive impact on businesses. One of
them is a policy that encourages cross-border investment that can reduce the
magnitude of political risk.
5. Local Content Requirements
Local content requirements are a form of regulation that requires companies to
purchase a number of goods or services that come from domestic producers or
suppliers. The existence of this regulation requires companies to use locally available
production raw materials or employ a certain number of local employees. The
regulation is aimed at ensuring international companies encourage local economic
activity and help alleviate the problem of national unemployment. This helps the
government to keep an eye on the activities of foreign companies in the country.
C. Types of Legal Systems and the Importance of the Global Legal System
The legal system is a set of rules and regulations, including the process of
establishing and implementing legal regulations. A country's legal system is influenced
by many cultural factors such as ideas or ideas regarding social and religious mobility.
Likewise, various regulations were established with the aim of preserving cultural values
and beliefs. Not only that, the legal system of a country is also influenced by the political
system. Governments that adhere to a totalitarian system tend to favor public ownership
of economic resources so that there are regulations that limit the behavior of independent
entrepreneurs. On the other hand, democratic political systems tend to implement
regulations that encourage entrepreneurial activities and protect the right to property
ownership. In addition, the condition of nationalism also affects the legal system of a
country. Nationalism can be interpreted as the loyalty of the people to the interests and
progress of their country. With this explanation, the main characteristics of common law,
civil law, and theocratic law are further explained.
1. Common Law
Common law is a legal system that is based on the legal history of a country
(tradition), previous court cases (precedent), and how the law is applied to certain
conditions or situations (usage). Each case brought before the court will be
interpreted based on these three elements. Nevertheless, each regulation can be
interpreted differently in different cases. Instead, each new interpretation will be used
as a basis for future cases. Countries that adopt common law generally have long
business contracts because they have to consider various possibilities and
interpretations.
2. Civil Law
Civil law is a legal system based on a set of written rules that form the legal code
of a country. Civil law is the oldest and most commonly used legal system. All
regulations have a clear and concise legal code so that interested parties only need to
draft a contract in accordance with what is explicitly stated in the code. All
obligations and responsibilities directly follow the relevant or relevant legal codes.
3. Theocratic Law
Theocratic law can be interpreted as a legal tradition based on religious
teachings. There are three main theocratic systems based on Islam, Hinduism and
Judaism. Currently, theocratic laws based on Islam are most widely used compared
to laws based on Hinduism and Judaism. Islamic theocratic law was originally a code
that governed the ethical and moral behavior of society. Furthermore, this law is also
applied in commercial transactions.
D. Business Ethics and Multinational Corporations
Ethical behavior is individual behavior that is in accordance with morality or
good behavior guidelines. The ethical dilemma that occurs is not a legal issue. This is
because every business person or manager has an obligation to behave in accordance
with existing guidelines. In the ethical dilemma, there is no right and wrong decision.
However, there are other alternatives depending on the perspective of each individual.
In addition to behaving ethically, businesses are also expected to carry out social
responsibility in the form of corporate social responsibilities (CSR). CSR is a business
practice that goes beyond legal obligations to actively balance business commitments to
stakeholders. These stakeholders include investors, customers, other companies, and the
community.
CSR practices can be in the form of various social activities such as giving
charity to the underprivileged, establishing schools in developing countries, and
protecting the global environment. Some company leaders realize that the future of their
company depends on environmental conditions and a healthy workforce. CSR practices
consist of three layers of activities. The first layer is known as traditional philanthropy
where companies donate a certain amount of money and some of their employees' time
to social causes. The second layer is related to risk management where companies
compile a specific code of conduct and agree to operate with a higher level of
transparency. The last layer is strategic CSR where companies build social responsibility
in their core operations in order to create value and build competitive advantage.
E. Economic Systems Adopted by the Countries of the World
A country's economic system consists of structures and processes used in
allocating its own resources and carrying out commercial activities. Each economic
system describes a tendency towards individualist or collective economic values that
reflect the cultural values of a nation. A culture that favors a theory based on individual
freedom and responsibility will shape the economic system of capitalism. On the other
hand, other cultures that support collective ideas tend to build socialist or even
communist economic systems. The national economic system can be described in a line
or a horizontal scale that has two extreme points. At one point there is a centralized
(pure) economic system or known as a centrally planned economy. On the other hand,
there is a pure market economic system or known as a market economy. Between these
two points is a mixed economic system known as the mixed economy
F. Main Characteristics of a Centralized Economic System
A centrally planned economy is an economic system in which the government
holds ownership rights over land, factories and other resources available in a country.
All economic activities and decisions are regulated by the government, including the
type of product, product price, labor and capital. In this case, there is a centralized
agency that specifies production objectives for factories and other production units and
sets the prices of the products produced. The main goal of a centralized economic system
is to achieve a set of political, social and economic goals. This is done by taking over
production and distribution activities in full.
The centralized economic system is rooted in the ideology of collectivism.
Similar to collectives that prioritize the interests of the group over the interests of the
individual, the centralized economic system seeks to achieve social and economic
justice. This idea was formulated and popularized by Karl Marx when he witnessed the
suffering of workers in Europe during the industrial revolution. As seen in Figure 4.1,
some of the countries that initially adopted a centralized economic system were Russia
(1917), China and South Korea (1940), and Cuba (1959). In addition, in 1970, this
centralized economic system began to develop in parts of central and Eastern Europe.
But since the end of 1980, countries have begun to abandon this economic system and
switch to a market economic system. One of the reasons for the decline of this system is
due to the failure to create economic value. In addition, this system fails to provide
incentives for businesses to maximize output and fails to achieve rapid economic
growth. Another reason is a centralized economic system that is not able to satisfy
consumer desires
G. Main Characteristics of the Market System
In a market economic system, most of the land, factories and other economic
resources are owned by the private sector, both by individuals and businesses. That is,
all decisions related to products, prices, and capital in the economy are determined by
market mechanisms. The market mechanism in question is in the form of an interaction
between demand and supply. This interaction between demand and supply will
determine the price of products and services. The lower the price, the more the number
of goods or services requested, vice versa. Similarly, the lower the price, the fewer goods
and services the company is willing to produce. In addition, product prices can also be
determined by market forces and other natural forces that are beyond the control of the
company.
The market economy system is rooted in the belief that the interests of
individuals must take precedence over the interests of the group. According to this view,
all groups of people will benefit when individuals receive incentives for doing certain
things. This is because individuals tend to have a higher motivation in caring for their
private property and tend to have less incentive to take care of public property. For
centuries, well-known economic philosophy advocated for government intervention to
manage some assets. But in the mid-1700s, a new approach emerged known as the
laissez-faire system. This system does not support any government intervention in
commercial activities. In other words, this economic system is more supportive of
individual freedom in carrying out economic activities.
The market economy system has three main characteristics. First, there is
freedom to choose. This gives individuals access to choose from a variety of alternative
purchasing options. In a market economy system, there are fewer obstacles to individual
decision-making. Second, the market economy system provides freedom for companies
and businesses in determining the types of goods and services produced. Companies
have the freedom to enter different lines of business, choose the market segments and
customers they want to pursue, recruit employees, and market their products. In other
words, companies are free to pursue their interests in maximizing profits. The third
characteristic is price flexibility that allows price movements. In contrast, non-market
economic systems tend to maintain prices at a certain level
In a market economy system, the government has less direct intervention in
business than in a centralized and mixed economic system. However, the government
has several important roles in the market economic system. One of them is the role of
the government in implementing antitrust laws. Antitrust laws are laws that prevent
certain companies from obtaining various benefits in an unfair way. In addition, the
government also plays a role in safeguarding individual property rights. To maintain
economic stability, the government also plays a role in forming a stable fiscal and
monetary environment and maintaining political stability.
H. Mixed Economic System and Multinational Corporations
A mixed economic system is an economic system when the government and the
private sector divide ownership of land, factories and other economic resources fairly.
In a mixed economic system, the government holds ownership rights over fewer
economic resources compared to a centralized economic system. However, the role of
the government is still considered important in overseeing the economic sector and
maintaining national security and stability in the long term. Some of the European
countries that have adopted a mixed economic system are Denmark, France, Spain,
Norway. In addition, this economic system has also been adopted by several countries
in Asia such as India, Indonesia, Malaysia, Pakistan and South Korea. Some other
countries that have adopted a mixed economic system are Argentina and South Africa.
Although it does not fully control economic activities, the government still influences
economic activities by providing incentives in the form of subsidies to various major
industries and being involved in the economy.
Proponents of the market economy system state that the success of the economic
system is not only seen in efficiency and innovation, but also in the ability to protect
society from individual greed. The goal of this economic system is to achieve low
unemployment rates, low poverty rates, stable economic growth and fair distribution of
wealth. However, some parties state that the mixed economic system does not increase
productivity levels. Currently, most countries that adopt a mixed economic system are
starting to make changes towards an economic system similar to a market economic
system. This is because if the assets are owned by the government, there tend to be few
incentives to reduce waste and innovate.
I. Various Measures of a Country's Economic Development
Economic development includes various economic developments in people's lives
such as improving physical health, life expectancy, education and literacy, poverty,
infrastructure, environmental sustainability and so on. Thus, this economic development
includes quantitative and qualitative measurements. However, economic development
requires economic growth, which is a measure of increasing the value of goods and
services produced. The following are some measurements of a country's economic
development.
1. National Production
Economic development measurements can use gross domestic product (GDP) or
gross national product (GNP). GDP is the value of all products and services produced
by the domestic economy in a certain period (one year). GDP is a narrower
measurement compared to GNP because it does not take into account revenue
derived from exports, imports and international operations of companies. If the value
of GDP is divided by the total population of a country, the value of GDP per capita
will be obtained. GDP per capita is used to measure the income of individuals in a
country.
Although GDP and GNP are the most commonly used indicators in measuring
economic development, they have some drawbacks. One of them is that there are
several types of transactions that are not taken into account in GDP and GNP. These
transactions can be in the form of voluntary work to prohibited transactions carried
out on the black market. In addition, the comparison of economic growth using GDP
and GNP values can be misleading. This is because the comparison does not take
into account the currency value and cost of living of each country.
2. Purchasing Power Parity (PPP)
The use of gross domestic product in comparing the production value of each
country does not take into account the cost of living that varies between countries.
Purchasing power is the value of goods and services that can be purchased with one
specific unit of currency. Purchasing power parity measures the relative ability of
two currencies to buy the same set of goods in both countries.
3. Human Development
The concept of purchasing power parity (PPP) has been able to show different
levels of economic development, but this indicator cannot describe people's welfare.
To describe human development, the human development index (HDI) can be used.
This index measures how far the government is able to provide equal opportunities
for its people in obtaining a healthy life, education and an appropriate standard of
living.
J. Economy in Transition and Possible International Business Barriers
In the last two decades, countries with centralized economic systems have begun to
make various changes towards a market economic system. This process is known as the
economic transition. The economic transition includes the process of changing the
fundamentals of economic organization and creating new free-market-based institutions.
The economic transition process generally aims to encourage economic progress in the
form of economic stabilization, price movements that describe demand and supply,
legalizing business activities carried out by the private sector, selling state-owned
companies, supporting property rights and reducing barriers to trade and investment.
The economic transition to a market economy system produces international business
opportunities. Nevertheless, the difficulties that come from the experience of using the
philosophy of the socialist economic system will be an obstacle. The following are some
of the obstacles in the economic transition.
1. Managerial Expertise
In a centralized economic system, production, distribution and marketing
strategies are hardly needed. This is because all aspects and commercial activities
are controlled by the government. In this case, the company does not need marketing
research. The company also does not think about pricing and does not need experts
in terms of operations, inventory, distribution or logistics. However, in recent years,
there has been a rapid development in the quality of management in countries that
are experiencing economic transition. This is due to improvements in the quality of
education, opportunities for schooling and working abroad as well as changes
brought about by foreign companies investing in the country.
2. Shortage of Capital
To facilitate the economic transition process requires considerable capital. The
government needs funds to build infrastructure and telecommunication systems,
including toll roads, bridges, network facilities, and other facilities. In addition, the
government also needs funds to build financial institutions and educate the public
about the market economic system. Some countries that cannot afford to fund all
these investments can look for other alternatives through loans from national and
international companies and from other financial institutions.
3. Cultural Differences
Economic transitions and reform efforts have resulted in a deep cultural
impression on a nation. The economic transition will release people's dependence on
the government and place more emphasis on individual responsibilities, incentives
and rights. Changes such as cuts and even the cessation of allowance payments and
the provision of job guarantees will be very surprising to the community.
4. Sustainability
Countries that are in an economic transition period often suffer from the negative
impact of changes in the economic system. In the short term, countries will feel the
negative impact greater than the benefits obtained from the economic transition.
However, with the development of economic transition efforts, more and more
people will also feel the great benefits of the market economy system.
