The Political and Legal Environments Facing Business

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CHAPTER THREE
THE POLITICAL AND LEGAL ENVIRONMENTS FACING BUSINESS

OBJECTIVES

To discuss the different goals and functions of political systems •To profile trends in the emergence and diffusion of political systems •To identify the idea of political risk and approaches to managing it •To understand how different political and legal systems affect the conduct of business •To profile trends in the evolution and diffusion of legal systems •To examine the major legal issues facing international business companies •To profile the idea of intellectual property and the basis of concern and controversy

Chapter Overview

When firms source, produce, and/or market products in foreign countries, they encounter dynamic and challenging political and legal environments. Chapter Three provides a conceptual foundation for the examination of the political and legal dimensions of international business operations. It compares major political regimes, discusses their potential influence upon the development of effective business strategies, and considers the relevance of political risk. The chapter also examines the major types of legal systems that exist today, as well as the strategic and operational concerns they pose. It concludes with a discussion of intellectual property rights and the associated challenges confronted in an age of globalization.

Chapter Outline

OPENING CASE:CHINA’S BUSINESS ENVIRONMENT
[See Map 3.1.]
During its thirty years of communist rule, China prohibited foreign investment and restricted foreign trade. Then, China enacted the Law on Joint Ventures Using Chinese and Foreign Investment in 1978. China’s subsequent transformation has been fueled by a landslide of foreign investments made in response to the country’s market potential, market performance, improved infrastructure, enormous resources, and strategic position. Frustrating this process, however, have been the politics of China’s elaborate bureaucracy, as well as its ill-defined legal system and pervasive corruption. Historically China has relied upon “the rule of man” and the belief that legal rights are derived from the power of the individual. It has also endured a long-running legal battle between the central and local Chinese authorities. Upon joining the WTO in 2002, China agreed to continue to reform its business environment and to move toward transparent, rules-based, enforcement-oriented standards. Coming full circle, today’s fully-owned Chinese enterprises are themselves becoming global investors, both by acquiring foreign firms and investing in greenfield facilities in foreign lands.

Teaching Tips: Carefully review the PowerPoint slides for Chapter Three. Also, review the corresponding video clip, “Counterfeiting in China” [World News Tonight, 3:10].

I.INTRODUCTION
For a multinational enterprise to succeed in countries with different political and legal environments, its management must carefully analyze the fit between its corporate policies and the political and legal conditions of each particular nation in which it operates. Then its must determine how these factors affect the ways in which the firm can capture opportunities and deflect threats. [See Fig. 3.1.]

II.THE POLITICAL ENVIRONMENT
A political system is the complete set of institutions, political organizations, and interest groups, the relationships among those institutions, and the political norms and rules that govern their functions. Thus, it integrates the various parts of a society into a viable, functioning entity. It also influences the extent to which government intervenes in business and the way in which business is conducted both domestically and internationally. The ultimate test of any political system is its ability to hold a society together. A.Individualism and Collectivism

It is useful to profile the similarities and differences among political systems according to the general orientation...
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