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chapter 3

Legal, Technological, Accounting, and

Political Environments

International Business, 6th E

dition

Griffin & Pustay

Copyright 2010 Pearson Education, Inc. publishing as Prentice Hall

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Chapter Objectives

• Describe the major types of legal systems confronting international businesses

• Explain how domestic laws affect the ability of firms to conduct international business

• List the ways firms can resolve international business disputes

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Chapter Objectives (continued)

• Describe the impact of the host country’s technological environment on international business

• Identify the factors that influence national accounting systems

• Explain how firms can protect themselves from political risk

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The Legal Environment

While domestic firms must follow laws and customs of the home country, international businesses must obey laws of the home country and all host countries.

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Legal Systems

Common Law Civil Law

Religious Law Bureaucratic Law

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Common Law

• Based on wisdom of judges’ decisions on individual cases through history

• Cases create legal precedents

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Countries Using Common Law

• United States

• Canada

• Australia

• India

• New Zealand

• Barbados

• Saint Kitts

• Nevis

• Malaysia

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Civil Law

• Based on codification of what is and is not permissible

• Originated in biblical times with the Romans

• Reinforced by French Napoleonic code

• Judge determines scope of evidence collected and presented

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Religious Law

• Based on the officially established rules governing faith and practice of a particular religion

• A country that applies religious law to civil and criminal conduct is called a theocracy

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Bureaucratic Law

Bureaucratic law is the legal system in communist countries and in dictatorships.

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Laws Affecting International Business Transactions

Sanction

Embargo

Extraterritoriality

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Laws Directed Against Foreign Firms

Nationalization Expropriation

Confiscation Privatization

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Economic and Political Impacts of MNCs on Host Countries

• Advantages

– Greater selection

– Higher standards

– Job creation

– Tax benefits

– Technology transfers

• Disadvantages

– Competition

– Job loss

– Dependency on economic health of MNC

– Political power

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Cultural Impacts of MNCs on Host Countries

• Advantages– Improved standard

of living

– Introduction of new products

– Better health care

– More sanitary food products

• Disadvantages– Abuse of less

developed policies in the areas of safety and environmental concerns

– Negligent product offerings

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Dispute Resolution

• Which country’s law applies?

• In which country should the issue be resolved?

• Which technique should be used to resolve the conflict?

• How will the settlement be enforced?

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Principle of Comity

• A country will honor and enforce within its own territory the judgments of foreign courts

• Conditions of the principle:

– Reciprocity is extended

– Defendant is given proper notice

– Judgment does not violate domestic statutes or treaty obligations

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Arbitration

Arbitration is the process by which both parties to a conflict agree to

submit their cases to a private individual or body whose decision

they will honor.

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The Technological Environment

Resources

Agriculturalland

Richnatural

resources

Skilledlabor

Low-costlabor

Infrastructure

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Intellectual Property

• Patents

• Copyrights

• Trademarks

• Brand names

Intellectual property often forms the basis of a firm’s competitive advantage!

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International Treaties Protecting Intellectual Property Rights

• International Convention for the Protection of Industrial Property Rights (i.e., the Paris Convention)

• Berne Convention for the Protection of Literary and Artistic Works

• Universal Copyright Convention

• Trade-Related Intellectual Property Rights Agreement

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The Accounting Environment

The Roots of National Differences

• GAAP - Generally Accepted Accounting Principles

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Figure 3.1 Influences on a Country's’ Accounting System

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The Accounting Environment

Differences in Accounting Practices

• Valuation and Revaluation of Assets

• Valuation of Inventories

• Dealing with Tax Authorities

• Use of Accounting Reserves

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The Accounting Environment (continued)

Other Differences

• Capitalization of Financial Leases

• Preparation of Consolidated Financial Statements

• Capitalization of Research and Development expenses

• Treatment of Goodwill

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The Accounting Environment (concluded)

Impact of Capital Markets

• International Financial Reporting Standards

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The Political Environment

Ownershiprisk

Transferrisk

Operatingrisk

Political Risk

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Table 3.2 Examples of Political Risks

• Expropriation

• Confiscation

• Campaigns against foreign goods

• Mandatory labor benefits legislation

• Civil wars

• Inflation

• Kidnappings, terrorist threats

• Repatriation

• Currency devaluations

• Increased taxation

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Levels of Political Risk

Macropoliticalrisk

Micropoliticalrisk

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Firms Need to Answer These Questions

• Is the country a democracy or dictatorship?

• Does the country rely on free market or government controls?

• Does the government view foreign firms as a positive influence?

• Are the firm’s customers private or public?

• Does the government act arbitrarily?

• Is the existing government stable?

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Map 3.3 Countries Relative to Political Riskiness, 2008

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Insurance Against Political Risks

• Overseas Private Investment Corporation (OPIC)

• Multilateral Investment Guarantee Agency (MIGA)

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