Political And Legal System

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Exposure to potential loss or adverse effects on company operations and profitability caused by developments in a country’s political and legal environments. Some examples like:
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Diverse political and legal systems, as managers must adhere to business laws and regulations.
Preferential subsidies, government incentives, and protectionism. International Business: Strategy, Management, and the
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Political or legal factor, economic, social, or technological developments.

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Unintended consequences- Laws may be unexpectedly harm business

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Weak enforcement of laws and regulations poses challenges.

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Regulations to protect intellectual property may exist on paper but are not adequately enforced.

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Risk is measured using various indicators, such as government debt, fiscal and monetary policy, and political stability.

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Risky countries: Iraq (war), Zimbabwe
(corruption, bribery, fraud and political turmoil), India (Hindu nationalists that came to political power in 1996 openly opposed foreign investment and foreign influence on Indian society- despite a series of economic reforms and markets liberalization efforts in 1991).

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Stable countries: Singapore, Hong Kong.
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Political and legal systems are dynamic, constantly changing and interdependent.

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Examples- new government, shifting values or priorities in political parties, new directions from special interest groups, and new laws or regulations

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The principal functions of a political system are to establish stability based on laws, provide protection from external threats, and govern the allocation of valued resources.
Country political systems are relatively unique.

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Totalitarianism
Totalitarian states from the past include China (1949–1980s), Germany (1933–1945), the Soviet Union
(1918–1991), and Spain (1939–1975).
■ Today, some states in the Middle East and Africa employ totalitarianism.
■ Totalitarianism- government controls not only all economic and political matters but the attitudes, values, and beliefs of its citizenry.
■ Totalitarian states are generally either theocratic (religion-based) or secular (non-religion-based).
■ Usually there is a state party led by a dictator, such as Kim Jong-il in North Korea. Party membership is mandatory for those who wish to advance.
■ Power is sustained via secret police, propaganda disseminated through state-controlled mass media, regulation of free discussion and criticism, and the use of terror tactics.
■ Totalitarian states do not tolerate activities by individuals or groups such as churches, labor unions, or political parties that are not directed toward the state's goals.
■ Transition- most of the world’s totalitarian states have either disappeared or shifted their political and economic systems toward democracy and capitalism. China initiated major reforms in the 1980s, and the
Soviet Union collapsed in 1991.
■ Transition- not easy- former Soviet states and China are still characterized by government intervention, red tape, bureaucratic accounting and tax regulations, inadequate legal systems to protect business interests, and weak infrastructure in transportation, communications, and information technology.

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Socialism

•capital and wealth should be vested in the state and used primarily as a means of production for use rather than for profit.
• Based on a collectivist ideology where group welfare outweighs individual welfare
•Socialists argue that capitalists receive a disproportionate amount of society's wealth relative to workers. Since the pay of workers does not represent the full value of their labor, government should control the basic means of production, distribution, and commercial activity. •Socialism has manifested itself in much of the world as social democracy, and has been most successful in Western Europe, and playing a role in Brazil and India.
•In social democratic regimes, such as France and Norway, government does intervene in the private sector and in business activities. Corporate income tax rates are higher, and even robust economies like Germany have experienced net outflows of FDI as businesses seek to escape extensive regulation.

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Democracy become the prevailing political system in much of the world’s advanced economies.
Two key features:
•Private property rights: The ability to own property and assets and to increase one’s asset base by accumulating private wealth.
Property includes tangibles: land and buildings, and intangibles: stocks, contracts, patent rights, and intellectual assets. Democratic governments devise laws that protect property rights. People and firms can acquire property, use it, buy or sell it, and bequeath it to whomever they want. These rights are important because they encourage individual initiative, ambition, and innovation, as well as thrift and the desire to accumulate wealth.
• Limited government: The government performs only essential functions that serve all citizens, such as national defense, maintaining law and order, diplomatic relations, and the construction and maintenance of infrastructure such as roads, schools, and public works.
State control and intervention in the economic activities of private individuals or firms is minimal. By allowing market forces to determine economic activity, resources are allocated with maximal efficiency.
Critics of pure democracy argue that, when inequalities become excessive, government should step in to level the playing field.
In democracies such as Japan, Germany, and Sweden, the individual rights and freedoms are balanced with broader social goals.
Social democracy- virtually all democracies include elements of socialism, such as government intervention in the affairs of individuals and firms. Socialistic tendencies emerge because of abuses or negative externalities that occur in purely democratic systems.
Example- Japan has been striving to achieve the right balance between democracy and socialism. In the 1990s, poor management practices and an economic recession led to the bankruptcy of thousands of Japanese firms. To maintain jobs and economic stability, the Japanese government intervened to support numerous large firms and banks that, in a pure democracy, would have failed. But such policies have also led to inflexibility in the Japanese economy and a delay of needed structural improvements.

Many countries, including Australia, Canada, the United States, and those in Europe, are best described as having a mixed political system –
‘characterized by a strong private sector and a strong public sector (with considerable government regulation and control).’

Democracy’s Link to Economic Freedom
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There is evidence suggesting that democracy leads to higher economic living standards.
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Economic freedom flourishes in free market and rule of law systems.

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Characteristics: free and fair elections, the right to form political parties, fair electoral laws, existence of a parliament or other legislative body, freedom from military domination etc.

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The state is responsible for making all decisions:
•What goods and services the country produces • Quantity of production • Prices at which they are sold
• Distribution

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Decisions about business activities resulted from the interaction of supply and demand (market forces).

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Economic decisions are left to individuals and firms. 

Government intervention is limited.

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Capitalism (private ownership of production)

■The state owns all wealth, land, and capital, and
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State should establish a allocates resources based on legal system which industries they want to
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Government may also develop. intervene to address the
■ Command economies inequalities that market were common in the economies sometimes twentieth century; they produce. 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 economiesexamples- China, India,
Russia, and International certain countries
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Exhibits market and command economy features Most industries are under private ownership, and entrepreneurs freely establish, own, and operate corporations- but the government also controls certain functions, pension programs, labor regulation, minimum wage levels, and environmental regulation. The state usually funds public education, health care, and other vital services and owns enterprises in transportation, telecommunications, and energy.
Examples- France, Germany,
Japan, Norway, Singapore, and
Sweden

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Legal systems provide a framework of rules and norms of conduct that mandate, limit, or permit specified relationships among people and organizations, and provide punishments for those who violate these rules and norms.

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Legal systems are dynamics.

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Common law (also known as case law) is a legal system that originated in England and spread to
Australia, Canada, the United States, and former members of the British Commonwealth.
■ The basis of common law is tradition, past practices, and legal precedents set by the nation’s courts through interpretation of statutes, legislation, and past rulings.
■ Common law is open to interpretation by courtsit is more flexible than other legal systems.
■ Judges have substantial power to interpret laws based on the unique circumstances of individual cases. Religious law is a legal system strongly influenced by religious beliefs, ethical codes, and moral values, viewed as mandated by a supreme being. ■ The most important religious legal systems are based on Hindu,
Jewish, and Islamic law- the most widespread is Islamic law, which is found mainly in the Middle East, North Africa, and Indonesia.
■ Islamic law (also known as shariah law) is derived from interpretations of the Qur’an, the holy book of Muslims, and the teachings of the Prophet Mohammed.
■ Islamic law is nonsecular and spells out norms of behavior regarding politics, economics, banking, contracts, marriage, and many other social issues. ■ It is seen as divinely ordained, Islamic law is relatively static and absolute. ■ Most Muslim countries currently maintain a dual system, with both religious and secular courts.
■ Muslim populations: Indonesia, Bangladesh, Turkey and Pakistan have secular constitutions and laws. Saudi Arabia and Iran use religious courts as authority over all aspects of jurisprudence.
■ Strict interpretation of Islamic law prohibits the giving and receiving of interest on loans or investments. Thus, to comply with Islamic law, banks charge administrative fees or take equity positions in the projects that they finance.

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Civil law, (also known as code law), is found in France,
Germany, Italy, Japan, Turkey, Mexico, and in Latin
America.
■ Its origins go back to Roman law and the Napoleonic
Code- based on an all-inclusive system of laws that have been “codified”—clearly written and accessible.
■ Civil law divides the legal system into three separate codes: commercial, civil, and criminal.
■ Rules and principles form the starting point- the codified rules emerge as specific laws and codes of conduct produced by a legislative body or some other supreme authority.
■ Both common law and civil law systems originated in western Europe and both represent the common values of western Europeans.

Socialist law is a legal system found mainly in the independent states of the former Soviet Union,
China, and a few states in Africa.
■ It is based on civil law, with elements of socialist principles that emphasize state ownership of property- state rights take precedence over individuals’. ■ Socialist law countries tend to view property and intellectual property rights more loosely.
■ As China and Russia adopt free-market principles, their legal systems increasingly incorporate additional elements of civil law.
Mixed systems- variation of two or more legal systems operating together
■ The contrast between civil law and common law has become particularly blurred as many countries combine both systems. Alternatively, legal systems in Eastern Europe mix elements of civil law and socialist law. Legal systems in Lebanon, Morocco, and Tunisia share elements of civil law and Islamic law. ■ Socialism is most associated with socialist law, but may include elements of common law and civil law.
■ Totalitarianism is most associated with religious law and socialist law.
Management, and the ■ Democracy is associated with common law, civil
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Government
The government, or the public sector, is the most important actor, operating at national, state, and local levels.
Governments have the power to enact and enforce laws. They are influential in how firms enter host countries and how they conduct business there.
Governments regulate international business activity through institutions, agencies, and public officials.
International Organizations
■ Supranational agencies such as the World Trade Organization (www.wto.org),
United Nations (www.un.org), and the World Bank (www.worldbank.org) have a strong influence on international business activities.
■ Such organizations help facilitate free and fair trade by providing administrative guidance, governing frameworks, and, occasionally, financial support. Regional Economic Blocs
Regional trade organizations, such as the European Union (EU), the North
American Free Trade Agreement (NAFTA), and the Association of Southeast Asian
Nations (ASEAN), aim to advance the economic and political interests of their members. The EU organization is especially well developed, with its own executive, legislative, and bureaucratic bodies.

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Special Interest Groups
These organizations are formed to serve the interests of particular countries, industries, or causes.
The Organization of Petroleum Exporting Countries (OPEC) is a powerful cartel that controls global oil prices, which, in turn, affect the cost of doing business and consumer prices. OPEC emerged in the 1970s as a collective and powerful voice for oil-producing countries, including Saudi Arabia, Kuwait, Iran, Venezuela,
Nigeria, and Indonesia.
Other groups control sugar, coffee, and iron ore
Special interest groups engage in political activity to advance specific causes, ranging from labor rights to environmental protection.
Competing Firms
Rival domestic firms with a strong presence in the host country naturally have an interest in opposing the entry of foreign firms into the local market and may lobby their government for protection.
Host-country competitors often complain when foreign firms receive financial support from the parent or host-country governments.
ExamplesAsterix, a French theme park, opposed French government support for the U.S.based Disney when Disneyland Paris was established.
U.S. automakers in Detroit opposed BMW’s construction of a factory in South
Carolina.

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These laws affect the type of entry strategy firms choose, as well as their operations and performance.
Many nations impose restrictions on inward FDI.

Examples:
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Japan- daitenhoo
(large-scale retail store law) restricted foreigners from opening warehouse-style stores such as WalMart or Toys“R”Us.

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Governments impose laws and regulations on how firms should conduct production, marketing, and distribution activities within their borders.

Determine which practices are allowed in

Laws regarding
Income
Repatriation.

advertising, promotion, and distribution.

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Prohibit cigarette advertising on television. Example- In China, a
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huge
Prohibit
telecommunications comparative advertising, in market, government which one brand is requires foreign touted as superior investors to seek joint to a specific ventures with local firms; competitor. local operations cannot
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Price ceiling be wholly owned by foreigners. This is to
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Product safety and ensure that China liability for defective maintains control of its products. telecommunications industry and obtains inward transfer of
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Repatriation restrictions limit the amount of net income or dividends that firms can remit to their homecountry headquarters-aiming to preserve hard currencies, such as euros, U.S. dollars, or
Japanese yen.

Environmental laws.
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Governments enact laws to preserve natural resources, combat pollution and the abuse of air, earth, and water resources, and ensure health and safety. Five types of
Contracts:
Sale of goods or services; Distribution of the firm's products through foreign
Distributors
Licensing and
Franchising that is, a contractual
Relationships
FDI, especially where this is
Done
incollaborati on with a foreign entity; and
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Allying with Qualified Local Partners
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A practical approach to reducing country risk is to enter target markets in collaboration with a knowledgeable and reliable local partner.

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Examples –due to various challenges in
China and Russia, Western firms often enter these countries by partnering with local firms.

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Environmental Scanning
Develop a comprehensive understanding of the political and legal environment in target countries.

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Scanning- assess potential risks/threats to the firm- good sources of intelligence:
• Employees working in the host country • Embassy and trade association officials 

Adherence to Ethical Standards

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Corporate social responsibility (CSR) -- operating a business in a manner that meets or exceeds the ethical, legal, commercial, and public expectations of stakeholders (customers, shareholders, employees, and communities). 

Examples of such behavior include: complying with local and international laws; not discriminating in hiring or promoting; providing fair and adequate wages; ensuring health and safety in the workplace; instituting a fair system of regular and overtime work hours; avoiding the use of child labor; providing adequate protection of the environment.

Protection through Legal Contracts
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A legal contract spells out the rights and obligations of each party and is especially important when relationships go awry.

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Contract law varies widely from country to country, and firms must adhere to local standards.

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Three approaches for resolving contractual disputes:
1.
Conciliation
2.
Arbitration
3.
Litigation

Safeguarding Intellectual Property Rights (IPRs)
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Intellectual property (often the basis for competitive advantage) consists of industrial property—patents, inventions, trademarks, industrial designs, and copyrights for works of literature, music, art, books, films, and TV shows. 

Laws enacted in one country are enforceable only within that country.

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Enforcement is a challenge because each individual country laws and practices differ widely. International Business: Strategy, Management, and the
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