IBO Finals Notes

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notes for the final

Text of IBO Finals Notes


    Name: Benjamin D Eyison Date:18th July 2013

    Ch.3 The Political and Legal Environments Facing Business

    Lecture 6: October 28th

    , 2010


    Defition of Legal System: The mechanism for creating, interpreting, and enforcing the laws

    in a specified jurisdiction.

    Modern legal systems exhibit elements of constitutional law, criminal law, and civil and

    commercial laws. Constitutional Law: sets the framework for the system of government

    and defines the authority and procedure of political bodies to establish laws and regulations.

    Criminal Law: safeguards society by specifying what conduct is criminal and prescribing

    punishment to those who breach these standards. Civil and Commercial Laws: ensures

    fairness and efficiency in business transactions.

    For example, the US & UK have a common law system

    Includes institutions and procedures to:

    o ensure law & order o Resolve disputes o Protect property (including intellectual property) o Tax economic output


    o Common law: is a legal system of jurisprudence based on judicial precedents. Also, it is based on tradition, judge-made precedent, and usage.

    o Civil law: is a legal system of jurisprudence based on statutory laws. Also, it is based on the systematic codification of laws and codes.

    o Theocratic law: is a legal system of jurisprudence based on religious teachings. It relies on religious doctrine, precepts, and beliefs to define the legal environment.

    o Customary law: is based on norms of behavior practiced over a long period. Also, it is anchored in the wisdom of daily experience.

    o Mixed systems: emerges when a nation uses two or more of the preceding legal systems.

    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. The rule of law holds that no individual is above laws that are clearly

    specified, commonly understood, and fairly enforced.

    o Level playing field for all

  • o Predictable and consistent application of laws o Transparency o Generally respected by public

    Extraterritoriality: the extension of national laws beyond the home country

    1. Means that companies from that country must abide certain rules no matter where they operate

    Example: US nationals and Iran

    Example: proposed Canadian legislation on mining companies

    2. Depending on the law, may even catch those who have no connection to home country Example: Helms-Burton Act in US and effect on Sherritt International

    Example: US Alien Tort Claims Act


    Illegal in all countries, but may not be enforced Numerous international agreements and laws Can harm business in numerous ways

    Example: Siemens

    Example: BAE and Saudi Arabia


    Lecture 7: November 04th

    , 2010


    Political system structural dimensions & power dynamics of prevailing government. The fundamental goal of a political system is to integrate different groups into a functioning, self-

    sustaining, and self-governing society. The test of a political system: uniting a society in the

    face of divisive viewpoints. Success supports peace and prosperity. Failure leads to

    instability, insurrection, and, ultimately, national disintegration.

    Individualism rights, self-expression, and freedom tied to democracy. Individualism refers to the primacy of the rights and role of the individual. The principle that all men have

    certain unalienable Rights that among these are Life, Liberty, and the pursuit of Happiness. The business implications of individualism hold that each person commands the right to

    make economic decisions largely free of rules and regulations. Countries with an

    individualistic orientation shape their marketplace with the idea of laissez-faire meaning

    leave things alone!

    Collectivism refers to the primacy of the rights and role of the group. This doctrine

    emphasizes the primacy of the collective whether it is a group, party, class, society, nation, race, etc. over the interest of the individual. Collectivism in the business world holds that the ownership of assets, the structure of industries, the conduct of companies, and the actions

    of managers must improve the welfare of society.

  • Totalitarianism single agent monopolizes political power. A totalitarian system subordinates the individual to the interests of the collective. A single agent in whatever form

    such as an individual, an assembly, a committee, a junta, or a party monopolizes political power. Types of totalitarian systems include: Authoritarianism: the regime tolerates no

    deviation from state ideology, Fascism: the control of peoples minds, souls, and daily existence and a social and political ideology with the primary guiding principle that the state

    or nation is the highest priority, rather than personal or individual freedoms., Secular

    totalitarianism: a single political party forms a government in which only party members

    hold office, elections are controlled through unfair laws, dissent is tolerated as long as it does

    not challenge the state, and organized religions, Theocratic totalitarianism: Under this

    system, government is an expression of the preferred deity, with leaders often claiming to

    represent the deitys interests on earth. Example, Taliban and Iran clergy.

    POLITICAL RISK: Political Risk is defined as as the potential loss arising from a change in government policy. More precisely, political risk is the likelihood that political

    decisions, events, or conditions will affect a countrys business environment in ways that will cost investors some or all of the value of their investment or force them to accept lower rates

    of return. The global economic crisis had increase political risk in the world. The primary

    types of political risk, from least to most disruptive, are: Systematic, Procedural, Distributive,

    and Catastrophic. Distributive Distributive political risk is creeping expropriation, increased taxes on profits, elimination of foreign companies local property rights. Catastrophic Catastrophic political risk can devastate companies and countries. It disrupts the business environment in a way that affects every firm in the country. If such disruptions

    spiral out of control, they devastate companies and countries.


    The Rules of the Game -

    Getting Started: Starting a business involves many legal activities: registering its

    name, choosing the appropriate tax structure, getting licenses and permits, arranging

    credit, and securing insurance. For example, starting a business is a straightforward

    process in Australia, requiring one registration procedure that encompasses tax, labor,

    and administrative declaration. Whereas in Africa, 75 days in Chad.

    Making and Enforcing Contracts: Once up and running, managers turn to entering

    and enforcing contracts with buyers and sellers. A contract is a binding legal

    agreement that formally exchanges promises, the breach of which triggers legal


    Hiring and Firing: No matter where you are operating, you will have to hire and,

    when necessary, fire workers. Many countries have flexible firing rules; however

    some have very robust rules. Necessary terminations are extremely difficult to

    execute and often involve extensive negotiations and settlements. Companies think

    twice, 10 times, before they hire new people (Hero Group)!

  • Bankruptcy / Closing Business: Finally, some countries make the task of closing a

    business difficult.

    General Relations (table 3.4): Singapore, New Zealand, Hong Kong, U.S. UK are

    rated among the top 5 best place to conduct international business. Theyre all democratic political system, a common or civil-law legal system, and a doctrine of

    the rule of law. In contrast, the majority of bottom-ranked countries have a totalitarian

    political system, a mixed legal system, and a doctrine of the rule of man.

    STRATEGIC CONCERNS: Operating concerns focus managers attention on day-to-day operations. Strategic concerns shift managers attention to long-term issues.

    Marketplace Behavior (antitrust) National laws determine permissible practices in all forms of business activities, including sourcing, distributing, advertising, and pricing

    products. Hence, countries permit and prohibit activities that then spur companies to

    adjust their manufacturing configuration, their supply chain coordination, and their

    marketing strategy. In France, the legal system regulates when transport trucks can use

    motorways (non on Sundays) or when shops can hold sales (twice a year, on dates set by

    government officials).

    Country of Origin: National laws affect the flow of products across borders. To determine charges for the right to import a product, host governments devise laws that

    consider the products country of origin, namely the country of manufacture, production, or growth where a product comes from. The global credit crisis and its implications to

    jobs have made issues of country of origin and local content regulation increasingly

    provocative themes of political debate.


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