PoliticalandLegalFactorsThatImpactInternationalTrade
Clarke Ricks
School of Business, Liberty University
BUSI 690: Policy and Strategy in Global Competition
Dr. Hicks
April 6, 2021
PoliticalandLegalFactorsThatImpactInternationalTrade
Why should businesses care about the different political and legal systems around the
world? To begin with, despite the globalization of business, firms must abide by the local
rules and regulations of the countries in which they operate. In the case study in Chapter 1
"Introduction", you discovered how US-based Google had to deal with the Chinese
government’s restrictions on the freedom of speech in order to do business in China. China’s
different set of political and legal guidelines made Google choose to discontinue its
mainland Chinese version of its site and direct mainland Chinese users to a Hong Kong
version.
Until recently, governments were able to directly enforce the rules and regulations
based on their political and legal philosophies. The Internet has started to change this, as
sellers and buyers have easier access to each other. Nevertheless, countries still have the
ability to regulate or strong-arm companies into abiding by their rules and regulations. As a
result, global businesses monitor and evaluate the political and legal climate in countries in
which they currently operate or hope to operate in the future.
Before we can evaluate the impact on business, let’s first look at the different political
and legal systems.
WhatAretheDifferentPoliticalSystems?
The study of political systems is extensive and complex. A political system is basically
the system of politics and government in a country. It governs a complete set of rules,
regulations, institutions, and attitudes. A main differentiator of political systems is each
system’s philosophy on the rights of the individual and the group as well as the role of
government. Each political system’s philosophy impacts the policies that govern the local
economy and business environment.
There are more than thirteen major types of government, each of which consists of
multiple variations. Let’s focus on the overarching modern political philosophies. At one end
of the extremes of political philosophies, or ideologies, is anarchism, which contends that
individuals should control political activities and public government is both unnecessary and
unwanted. At the other extreme is totalitarianism, which contends that every aspect of an
individual’s life should be controlled and dictated by a strong central government. In reality,
neither extreme exists in its purest form.
Instead, most countries have a combination of both, the balance of which is often a
reflection of the country’s history, culture, and religion. This combination is called pluralism,
which asserts that both public and private groups are important in a well-functioning
political system. Although most countries are pluralistic politically, they may lean more to
one extreme than the other.
In some countries, the government controls more aspects of daily life than in others.
While the common usage treats totalitarian and authoritarian as synonyms, there is a
distinct difference. For the purpose of this discussion, the main relevant difference is in
ideology. Authoritarian governments centralize all control in the hands of one strong leader
or a small group of leaders, who have full authority.
These leaders are not democratically elected and are not politically, economically, or
socially accountable to the people in the country. Totalitarianism, a more extreme form of
authoritarianism, occurs when an authoritarian leadership is motivated by a distinct
ideology, such as communism. In totalitarianism, the ideology influences or controls the
people, not just a person or party. Authoritarian leaders tend not to have a guiding
philosophy and use more fear and corruption to maintain control.
Democracy is the most common form of government around the world today.
Democratic governments derive their power from the people of the country, either by direct
referendum (called a direct democracy) or by means of elected representatives of the
people (a representative democracy). Democracy has a number of variations, both in theory
and practice, some of which provide better representation and more freedoms for their
citizens than others.
What businesses must focus on is how a country’s political system impacts the economy
as well as the particular firm and industry. Firms need to assess the balance to determine
how local policies, rules, and regulations will affect their business. Depending on how long a
company expects to operate in a country and how easy it is for it to enter and exit, a firm
may also assess the country’s political risk and stability. A company may ask several
questions regarding a prospective country’s government to assess possible risks:
1. How stable is the government?
2. Is it a democracy or a dictatorship?
3. If a new party comes into power, will the rules of business change dramatically?
4. Is power concentrated in the hands of a few, or is it clearly outlined in a constitution
or similar national legal document?
5. How involved is the government in the private sector?
6. Is there a well-established legal environment both to enforce policies and rules as
well as to challenge them?
7. How transparent is the government’s political, legal, and economic decision-making
process?
While any country can, in theory, pose a risk in all of these factors, some countries offer
a more stable business environment than others. In fact, political stability is a key part of
government efforts to attract foreign investment to their country. Businesses need to assess
if a country believes in free markets, government control, or heavy intervention (often to
the benefit of a few) in industry.
The country’s view on capitalism is also a factor for business consideration. In the
broadest sense, capitalism is an economic system in which the means of production are
owned and controlled privately. In contrast, a planned economy is one in which the
government or state directs and controls the economy, including the means and decision
making for production. Historically, democratic governments have supported capitalism and
authoritarian regimes have tended to utilize a state-controlled approach to managing the
economy.
As you might expect, established democracies, such as those found in the United States,
Canada, Western Europe, Japan, and Australia, offer a high level of political stability. While
many countries in Asia and Latin America also are functioning democracies, their stage of
development impacts the stability of their economic and trade policy, which can fluctuate
with government changes. Chapter 4 "World Economies" provides more details about
developed and developing countries and emerging markets.
Within reason, in democracies, businesses understand that most rules survive changes
in government. Any changes are usually a reflection of a changing economic environment,
like the world economic crisis of 2008, and not a change in the government players.
This contrasts with more authoritarian governments, where democracy is either not in
effect or simply a token process. China is one of the more visible examples, with its strong
government and limited individual rights. However, in the past two decades, China has
pursued a new balance of how much the state plans and manages the national economy.
While the government still remains the dominant force by controlling more than a third of
the economy, more private businesses have emerged.
China has successfully combined state intervention with private investment to develop
a robust, market-driven economy—all within a communist form of government. This system
is commonly referred to as “a socialist market economy with Chinese characteristics.” The
Chinese are eager to portray their version of combining an authoritarian form of
government with a market-oriented economy as a better alternative model for fledging
economies, such as those in Africa. This new combination has also posed more questions for
businesses that are encountering new issues—such as privacy, individual rights, and
intellectual rights protections—as they try to do business with China, now the second-
largest economy in the world behind the United States.
