3-1

Chapter Two:

The Political, Economy and Legal Environments Facing Business

3-2

Political and Legal Factors Influencing International Business Operations

3-3

Definition of a Political System

• The complete set of institutions, political organizations, and interest groups,

• The relationships among institutions, and the political norms and rules that govern their functions

3-4

Individualism vs. Collectivism

• Individualism: primacy of the rights and role of the individual

• Collectivism: primacy of the rights and role of the community

3-5

Political Ideology

• The system of ideas that expresses the goals, theories, and aims of a sociopolitical program

• Most modern societies are pluralistic—different groups champion competing political ideologies

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The Political Spectrum

3-7

Democracy

• Wide participation by citizens in the decision-making process

• Five types:– Parliamentary– Liberal– Multiparty– Representative– Social

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Fundamental Elements of Democratic Political Systems

3-9

Totalitarianism

• Restricts decision making to a few individuals• Types:– Authoritarianism– Fascism– Secular totalitarianism– Theocratic totalitarianism

3-10

Trends in Political Systems

• Third Wave of Democracy• Engines of Democracy

1. The failure of totalitarian regimes to deliver economic progress

2. Improved communications technology3. Economic dividends of increasing

political freedom

3-11

Definition of Political Risk

• The risk that political decisions or events in a country negatively affect the profitability or sustainability of an investment

• Types:– Systemic– Procedural– Distributive– Catastrophic

3-12

Definition of a Legal System

• The mechanism for creating, interpreting, and enforcing the laws in a specified jurisdiction

• Types:– Common law– Civil law– Theocratic law– Customary law– Mixed systems

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Trends in Legal Systems

• The preference for stability• The influence of national legacies

3-14

Bases of Rules

• Rule of Man-ultimate power resides in a person

• Rule of Law-institutes a just political and social environment, guarantees the enforceability of commercial contracts and business transactions, and safeguards personal property and individual freedom

3-15

Operational Concerns that Face Managers Worldwide

• Starting a business• Entering and enforcing contracts• Hiring and firing local workers• Closing down the business

3-16

Strategic Concerns that FaceManagers Worldwide

• Product safety and liability• Marketplace behavior• Product origin and local content• Legal jurisdiction• Arbitration

3-17

• Intangible property rights that are a result of intellectual effort

• Intellectual property rights refer to the right to control and derive the benefits from writing, inventions, processes, and identifiers

• Local attitudes play a large role in piracy

Intellectual Property

2-18

Legacies, Economics, and Orientation

• Legal Legacies

• Wealth, Poverty, and Protection

• Cultural Orientation

2-19

The Driver of Change

Countries that generate intellectual property are

strong advocates of protecting the ownership rights.

2-20

How Are Contracts Enforced In Different Legal Systems?

• A contract is a document that specifies the conditions under which an exchange is to occur and details the rights and obligations of the parties involved

• Contract law is the body of law that governs contract enforcement• Under a common law system, contracts tend to be very detailed with all

contingencies spelled out• Under a civil law system, contracts tend to be much shorter and less

specific because many issues are already covered in the civil code• Many countries have ratified the United Nations Convention on

Contracts for the International Sale of Goods (CIGS) which establishes a uniform set of rules governing certain aspects of the making and performance of everyday commercial contracts between buyers and sellers who have their places of business in different nations

3-21

• Intangible property rights that are a result of intellectual effort

• Intellectual property rights refer to the right to control and derive the benefits from writing, inventions, processes, and identifiers

• Local attitudes play a large role in piracy

Intellectual Property

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How Can Intellectual Property Be Protected?

• Intellectual property - property that is the product of intellectual activity

• Can be protected using1. Patents – exclusive rights for a defined period to the

manufacture, use, or sale of that invention2. Copyrights – the exclusive legal rights of authors,

composers, playwrights, artists, and publishers to publish and disperse their work as they see fit

3. Trademarks – design and names by which merchants or manufacturers designate and differentiate their products

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How Can Intellectual Property Be Protected?

• Protection of intellectual property rights differs from country to country – World Intellectual Property Organization – Paris Convention for the Protection of Industrial Property

• To avoid piracy, firms can – stay away from countries where intellectual property laws

are lax– file lawsuits– lobby governments for international property rights

agreements and enforcement

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How Are Property Rights And Corruption Related?

• Property rights refer to the legal rights over the use to which a resource is put and over the use made of any income that may be derived from that resource

• Can be violated through1. Private action – theft, piracy, blackmail 2. Public action - legally - ex. excessive taxation or illegally - ex.

bribes or blackmailing • high levels of corruption reduce foreign direct investment, the level of

international trade, and the economic growth rate in a country

• The Foreign Corrupt Practices Act makes it illegal for U.S. companies to bribe foreign government officials to obtain or maintain business over which that foreign official has authority

Economic Systems• Centrally Planned– Government ownership of economic resources

and state planning• Mixed– Government and private ownership of economic

resoures split rather evenly• Market– Mostly private (individual or business) ownership

of economic resources

Centrally Planned Economy• Government owns most land, factories, and other economic

resources and plans nearly all economic activity– Welfare of the group is paramount– Economic and social equality is the goal– “Communist” system is needed

• Asia• Central Europe• Eastern Europe• Latin America

– Russia (1917)– China (1949)– Cuba (1959)

Decline of Central Planning

• Central planning failed to:- Create economic value- Provide incentives- Achieve rapid growth- Satisfy consumer needs

Focus on China• Socialism with Chinese characteristics– Communist after civil war ended in 1949– Agricultural reforms began in 1979– Township and Village Enterprises legal in 1984– Aggressive reform since that time

• Challenges ahead– Political problems and social unrest– Unemployment and migrant labor– Eventual(?) reunification with Taiwan– Advanced entrepreneurial and management skills

Mixed Economy• Government and private parties share ownership of

land, factories, and other economic resources rather evenly

• Noble goals– Low unemployment and poverty– Steady economic growth– Equitable distribution of wealth

• But stagnant– State-owned businesses uncompetitive– Prices and taxes higher, living standards mixed– Privatized state firms to boost competitiveness

Market Economy• Private parties (individuals or businesses) own vast

majority of land, factories and other economic resources

• Supply– Quantity of a good or service that producers are willing to

provide at a specific selling price

• Demand– Quantity of a good or service that buyers are willing to

purchase at a specific selling price

Laissez-Faire Economics• Less government interference in commerce– Free choice

• Consumers choose freely from alternative purchase options

– Free enterprise• Firms decide which products to sell and markets to enter

– Price flexibility• Most prices follow the forces of supply and demand

Government’s Role in aMarket Economy

• Enforce antitrust laws• Preserve property rights• Provide fiscal and monetary stability• Preserve political stability

Preserve Property Rights• Encourages risk-taking by people and business as

claims to assets and future earnings are protected– Market economy needs strong property rights– Entrepreneurs start new businesses– Firms create new technologies and products

Provide Fiscal & Monetary Stability• Encourages commerce in a nation because it

improves its reputation as a place to do business– Fiscal policies (taxation, government spending)– Monetary policies (money supply, interest rates)– Reduces overall uncertainty– Improves business forecasts– Holds inflation and unemployment low

Preserve Political Stability

• Encourages businesses to engage in activities without fear of disrupted future operations– Promotes economic growth generally– Reduces worries of political risk– Improves chances for business survival

Economic Development• Economic well-being of one nation’s people relative

to another nation’s people- Economic output (agricultural, industrial, service)- Infrastructure (communications, transportation,

power)- People (physical health, education level)

• Productivity is key– Ratio of outputs (that created) to inputs (resources used

to create output)

National Production

• GDP is the value of goods and services that a nation produces during a one-year period (GNP adds international activities)

• Potential problems– Overlooks certain transactions– Ignores economic growth rates– Averages disguise regions– May ignore purchasing power

• Purchasing power parity– Relative ability of two countries’ currencies to buy the same “basket”

of goods in those two countries

Classifying Countries• Developed Country

– Highly industrialized, highly efficient, and whose people enjoy a high quality of life

• Emerging Market– Newly industrialized countries plus those with potential to be newly

industrialized• Newly Industrialized Country

– Recently greater national production and exports from industrial operations

• Developing Country– Poor infrastructure and extremely low personal income

Economic Transition• Fundamental reorganization of an economy and the

creation of new free-market institutions• Reforms include:

- Reduce budget deficits and expand credit- Allow the “price mechanism” to determine prices and economic activity- Legalize private firms and privatize state-owned assets within a property

rights framework- Remove barriers to trade and investment and eliminate currency controls- Ensure social-welfare system to ease transition

Obstacles to Transition

• Lack of managerial expertise• Capital shortage• Environmental degradation• Cultural differences