© 2001 Prentice Hall 3-1

International Businessby

Daniels and Radebaugh

Chapter 3Political and LegalEnvironments Facing Business

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ObjectivesTo discuss the different functions that political systems

performTo compare democratic and totalitarian political regimes and

discuss how they can influence managerial decisionsTo describe how management can formulate and implement

strategies to deal with foreign political environmentsTo study the different types of legal systems and the legal

relationships that exist between countriesTo examine the major legal issues in IB

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Cultural Influences on International Business

EXTERNAL INFLUENCES

COMPETITIVE ENVIRONMENT

PHYSICAL AND SOCIETAL FACTORS• Political policies and legal practices• Cultural factors• Economic forces• Geographical influences

OPERATIONS

OBJECTIVES

MEANS

STRATEGY

• Basic political ideologies• Impact of the political system on management decisions• Formulating and implementing political strategies• Legal environment

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The Political EnvironmentThe role of the political system is to integrate the society

• Influences how business is conductedPolitical process functions

• Interest articulation• Interest aggregation—the collection of interests in the

political system• Policy making• Policy implementation and adjudication

MNE management• Lobbies governments on policies that affect business• Avoid appearances of inappropriate influence on the law

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Basic Political IdeologiesPolitical ideology—a body of constructs, theories, and aims that

constitute a sociopolitical program• Pluralist society—different ideologies coexist because

there is no one ideology accepted by all– difficult to understand the political environment in a

pluralist society• Ultimate test of any political system is its ability to hold a

society together despite pressures from different ideologies

• Ideologies also help bring countries togetherThe impact of ideological differences on national boundaries

• Differences in political ideology have affected boundaries in Europe

• When operating in a foreign country, must understand the potential sources of political tension and instability

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The Political Spectrum

AuthoritarianFascist

Com

mun

ist

AuthoritarianRadicalL

iberal

Con

serv

ativ

e

Reactionary

TotalitarianismDemocracy DemocraticGovernment

Nondemocratic Government

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A Political SpectrumDemocracy—involves wide participation by citizens in the

decision-making process• Freedom of opinion, expression, press, and freedom to

organize• Election of political representatives• Limited term of elected officials• Independent and fair court system• Nonpolitical bureaucracy and defense infrastructure• Accessibility to the decision-making process

Democratic governments differ• Presidential versus parliamentary• Number of important political parties• Amount of citizen participation in decision making• Fragility and stability of new democracies

Democracy believed to be the best form of government

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Comparative Measures of Freedom

1981 1990 1998

Free 35.9% 21.6% 40.0%Partly Free 38.9 21.6 26.5Not Free 20.0 40.0 33.5

Free Partly Free Not Free

Dem

ocra

cy

Totalitarianism

Political Rights

Civil Liberties

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A Political Spectrum (cont.)Totalitarianism—a single party, individual, or group of

individuals monopolizes political power• Neither recognizes nor permits opposition• Theocratic—religious leaders are political leaders• Secular—government often imposes order through

military power• Totalitarianism takes several forms

– Fascism—desires to control people’s minds and souls, converting them to its own faith

– Authoritarianism—desires to control the people– Communism—political and economic systems are

virtually inseparable» equal distribution of wealth» government ownership and control of resources

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Impact of the Political System on Management DecisionsPolitical Risk—caused by political instability

• Promotes fear that operating position will deteriorate• Tends to be higher in totalitarian regimes

Causes of political risk• Change in the opinions of political leadership• Civil disorder stemming from economic conditions,

human rights violations, or group animosity• External relations—animosity between host country and

foreign investor’s countryTypes of political risk

• Micro—political actions are aimed at specific foreign investments

• Macro—political actions affect a broad spectrum of foreign investors

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Government Intervention in the EconomyIndividualistic paradigm

• Belief in minimal government intervention in the economy

• Likely to be democratic and economically free• Promotes marketplace competition

– regulates marketplace when competition by itself is unreliable or unacceptable

Communitarian paradigm• Government tends to be prestigious

– thrives on a respected, centralized bureaucracy• May be democratic or authoritarian

– stable political party or coalition in power• Government may start partnership with business

Government action toward business is not always consistent

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Formulating and Implementing Political StrategiesEstablishing a political strategy in the host country

• Identify the issue• Define the political aspect of the issue• Assess the potential political action of other companies

and special-interest groups• Identify important institutions and key people• Formulate strategies• Determine the impact of implementation• Select the most appropriate strategy and implement

Implementing a strategy—marshal whatever resources necessary to accomplish the company’s goals

• Lobbyists educate and persuade government decision makers

• Enlist support of consumers

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Kinds of Legal SystemsCommon law—based on tradition, precedent, custom, and

usage• Interpretation by the courts

Civil law—codified legal system• Based on a detailed set of laws that make up a code• Rules for business transaction included• Based on how the law is applied to the facts

Theocratic law—based on religious precepts• e.g., Islamic law

– has remained frozen– moral rather than commercial law– intended to govern all aspects of life

Consumer safeguards—differ in different legal systems• Deal with product liability issues

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The Legal ProfessionLawyers and their firms

• Vary among countries in terms of how they practice law and serve clients

• Most firms are quite small• Firms have expanded abroad in order to serve their

clients– large legal firms often created through mergers or

correspondent relationships with firms in other countries

• Legal staffs have to understand local laws and practices

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Legal Issues in International BusinessAffect many aspects of IBNational laws

• May affect both domestic and foreign companies operating within the country’s borders

– health and safety standards– employment practices– antitrust prohibitions– contractual relationships– environmental practices– patents and trademarks

• May govern cross-border activities– investment of capital– payment of dividends to foreign investors– customs and duties on imports