F08 Ch 06 Political and Legal Syste

8/8/2019 F08 Ch 06 Political and Legal Syste

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International Business: Strategy, Management, and the New Realities 1

International Business

Strategy, Management & the New Realities

by

Cavusgil, Knight and Riesenberger

Chapter 6

Political and Legal Systems in

National Environments


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Country Risk

Exposure to potential loss or adverse effects on

company operations and profitability caused by

developments in a countrys political and/or legal

environments. Also referred to as political risk.

Each country has a unique political and legal

system that may pose challenges for company

strategy and performance


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What Gives Rise to Country Risk?

Immediate cause is a political or legal factor, buteconomic, social, or technological developmentsmay be the root cause.

Laws may be unexpectedly strict, political/

legislative actions may harm business (eventhough not the intent).

Example - In China, the government censorsmaterial that criticizes the government. Yahoomust monitor the information that appears on its

Web site to prevent the Chinese governmentfrom shutting down its China operations.

Weak law enforcement is also often a factor.


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What are Political and Legal Systems?

Political system - a set of formal institutions

that constitute a government and how these

groups interact with each other. Includes

legislative bodies, political parties, lobbyinggroups, and trade unions.

Legal system - a system for interpreting and

enforcing laws and regulations. Includesinstitutions and procedures for ensuring order

and resolving disputes.


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Three MajorTypes of Political Systems

Totalitarianism

Socialism

Democracy

These categories are not mutually exclusive. E.g.,

most democracies include some elements of

socialism.


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Totalitarianism

Government controls all economic and political matters. Eithertheocratic (religion-based) orsecular

A state party is led by a dictator. Membership is mandatory

for those wanting to advance.

Power sustained via secret police, propaganda, regulation offree discussion and criticism.

Examples: China (19491980s), Germany (19331945),

Soviet Union (19181991), and Spain (19391975).

Today, some states in the Middle East and Africa employtotalitarianism.

Many ex-totalitarian states have much government

intervention, red tape, and bureaucracy


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Socialism

Capital and wealth vested in the state and used

primarily as a means of production for use rather

than for profit.

Group welfare outweighs individual welfare.

Governments role is to control the basic means of

production, distribution, and commercial activity.

Socialism occurs in much of the world as social

democracy(e.g., Western Europe, Brazil,India).

Frequent government intervention in the private

sector.

Corporate income tax rates are higher.


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Two Key Features of Democracy

Private property rights: The ability to own property

and assets and to increase ones asset base by

accumulating private wealth. Propertyincludes

land, buildings, stocks, contracts, patents.

Encourages initiative, ambition, innovation.

Limited government: The government performs

only essential functions that serve all citizens, such

as national defense, maintaining law & order,foreign relations, and providing basic infrastructure


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Democracys Link to Economic Freedom

Empirical evidence suggests that

democracy -- greater economic freedom

leads to higher economic living standards.

Economic freedom flourishes in systems

characterized by:

Free market economics Strong rule of law

Minimal government intervention in business


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Command (Centrally Planned) Economies

The state is responsible for making all decisions: whatgoods and services the country produces; quantity of

production; prices at which they are sold; and distribution.

The state owns all wealth, land, and capital, and allocates

resources based on which industries they want to develop. Common in the 20th century, command economies proved

so inefficient that most have gradually died out.

Central planning is less efficient than market forces in

synchronizing supply and demand.

Today many countries exhibit some characteristics of

command economies; e.g., China, India, Russia, and

certain countries in Central Asia, Eastern Europe, and

Middle East.


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Market Economies and Mixed Economies

In market economies,

Decisions are largely left to market forces, theinteraction of supply and demand.

Individuals and firms are main decision

-makers.

Government intervention is limited.

Associated mainly with Capitalism

Mixed economies have features of both market andcommand economies, combining state intervention

andmarket mechanisms (e.g., Sweden, Singapore)


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Five Types of Legal Systems

The five legal systems are the foundation for

laws and regulations:

Common law

Civil law

Religious law

Socialist law

Mixed systems


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Common (Case) Law

A legal system that originated in England andspread to Australia, Canada, USA, and other

former members of the British Commonwealth

(also known as case law).

The basis of law is tradition, past practices, and

legal precedents set by courts via interpretation

of statutes, legislation, and past rulings.

Judges have much power to interpretlawsbased on the circumstances of individual cases.

Thus, common law is relatively flexible.


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Civil (Code) Law

Found in France, Germany, Italy, Japan, Turkey,

and much ofLatin America.

Based on an all-inclusive system of laws that have

been codified, clearly written by legislative bodies Laws are more cast in stone and not strongly

subject to interpretation by courts

* * * * * * * *

A key difference between civil law and common law is thatcommon law is mainly judicialin origin and based on court

decisions, whereas civil law is mainly legislative in origin and

based on laws passed by legislatures


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Religious Law

Strongly influenced by religious beliefs,

ethical codes, and moral values, viewed as

mandated by a supreme being.

Most important religious legal systems arebased on Hindu, Jewish, and Islamic law.

Islamic law spells out norms of behavior

regarding politics, economics, banking,

contracts, marriage, and many other social

and business issues.


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Socialist Law

Found mainly in China, former Soviet

Union, and a few states in Africa

Based on Civil Law, with elements of

socialist principles that emphasize stateownership of property -- state rights take

precedence over individuals

Tends toward loose treatment of propertyand intellectual property rights


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Actors in Political and Legal Systems

The government, or the public sector, is the most

important actor, operating at federal and local levels.

Supranational agencies such as the World Trade

Organization, United Nations, and the World Bank

Regional trade organizations, such as the

European Union (EU), the North American Free

Trade Agreement (NAFTA), etc.

Special interest groups such as labor unions andenvironmental groups

Local competing firms oppose foreign firms, and

lobby their governments accordingly.


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Country Risk Produced by the Political System:

Government Takeover of Corporate Assets

Confiscation: seizure of foreign assets withoutcompensation. E.g., Venezuelan President Hugo

Chavez confiscated a major oil field owned by

French firm Total.

Expropriation: seizure of corporate assets withcompensation.

Nationalization: government takeover of an entire

industry, with or without compensation. In 2006, the

government of Bolivia nationalized much of thecountrys oil and gas industry.

Privatization: selling state-owned enterprises to

private interests.


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Country Risk Produced by the Legal System

Foreign investment laws affect the type of entry

strategy firms choose, as well as their operations

and performance. Nations impose restrictions on

inward FDI, such as Japans large retail store law or

the U.S. and Dubai Ports World

Controls on operating forms and practices affect

firms production, marketing, and distribution

activities. E.g., China requires market entry via joint

venture in its huge telecommunications sector.


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Country Risk Produced by the Legal System

Marketing and distribution laws determine whichpractices are allowed in advertising, promotion, and

distribution. E.g., laws may restrict TV advertising

aimed at children.

Laws regarding income repatriation limit the

amount of net income or dividends that firms can

bring back to the home country.

Environmental laws are intended to preservenatural resources, combat pollution, and ensure

health and safety. E.g., in Germany, firms must

follow strict recycling regulations.


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Country Risk Arising from the

Home-CountryLegal Environment

Extraterritoriality: application of home-

country laws to other countries. E.g., the

European Union has pursued Microsoft for

perceived monopolistic practices.

Foreign Corrupt Practices Act (1977) made

it illegal to offer bribes to foreign parties. But,

definition of a bribe is unclear; Harms U.S.interests because foreign competitors are not

so constrained.


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Transparency in Financial Reporting

Transparency -- degree to which firms regularly

reveal substantial financial & accounting

information

Timing and transparency of financial reporting

vary widely around the world.

Sarbanes-Oxley Act (2002) promotes greater

transparency in accounting practices. But, costof compliance is high; Discourages foreign firms

from listing or transacting extensively in the U.S.


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Ethical Values and Practices

Ethics refers to the moral behavior of people,

firms, or governments- issues often arise, or

may be exacerbated, by deficiencies in legal

systems.

Corruption typically involves the use of bribery

and fraud to achieve business goals. Most

common in developing economies.


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Contract Law

Local contract law is a factor in five types of

contracts:

1.Sale of goods or services;2.Distribution via foreign intermediaries;

3.Licensing and franchising;

4.F

oreign direct investment; and5.Joint ventures.


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Protection through Legal Contracts

A legal contract spells out the rights and obligations ofeach party; especially important when relationships goawry.

Three approaches for resolving contractual disputes:

1. Conciliation is the least adversarial method; a formal

process of negotiation that aims to resolvedifferences in a friendly manner. Common in China.

2. Arbitration is a process in which a neutral third partyhears both sides of a case and decides in favor ofone party or the other, based on an objective

assessment of the facts.3. Litigation is the most adversarial approach, andoccurs when one party files a lawsuit against another;Most common in the United States.


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F08 Ch 06 Political and Legal Syste

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