Political & Legal Environment of IB

8/8/2019 Political & Legal Environment of IB

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The Institutional Context

Organizations work closely with governments andpolitical actors in a pluralistic environment.

Frequently, business objectives require thecooperation of political authority and managers findthemselves working with government officials andministries to clear the way for operations.

The ease of this work depends on the institutional context they face in their negotiations.


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The Institutional Context

Managers sometimes work with governments thatare similar to their own. This makes the workeasier, due to affinity between the company and thepolitical actors, with common understanding of how

a system works.

Sometimes, however, managers find themselvesworking with governments that are very different.

This sometimes presents an animosity of systemsthat make the work a great deal more frustratingand difficult.


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The MNE-Government Relationship

Relationships between governments in the homeand host countries is an important issue facingMultinational Enterprises.

Governments affect the economic and legalenvironment. They set monetary and tax policies,price controls, and intellectual property regulations.

They also influence labor relations, trade policies,capital and exchange controls, and transfer pricing

policies. Government can be a regulator, alegislator, a competitor, a customer, a distributor,and a potential partner.


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The MNE-Host Government Relationship

Political power and size have a great deal to do withhow Multinational Enterprises deal with hostgovernments.

Models like Sovereignty at Bay, Dependency, and Neo-Mercantilism all assume a powerful MNEinteracting with a less powerful developing country.

Some assume that the MNE doesnt act in theLDCs best interest, and will pursue institutional

hegemony and control over that LDC.


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The MNE-Host Objectives

Favorable Trade And Investment Environment Nondiscrimination Access To Markets Few Regulatory Hurdles Legitimacy


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The Host-MNE Objectives

Protecting Vital Interests National Security Taxation Participation Protection Of Markets And Employment Legitimacy


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The MNE-Host Bargaining Power

Host bargaining power comes from creating anattractive environment.

Multinational Enterprise bargaining power comesfrom proprietary technologies or products, capital,

potential tax revenue, big exports, employment,complex management requirements, orpolitical/economic alliances.


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Governments Investment Support

Governments compete fiercely for investment. Theyfrequently provide incentives to companies seekingto invest.

These range from grants and investment

allowances, to subsidies, preferential tax treatment,import duty exemptions, loans, loan guarantees,and interest subsidies. These incentives canexceed $100 Million to $ 1 Billion.


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The MNE-Home Government Relationship

The home government provides main operatingenvironment, helps negotiate its international affairsand incentives, and even provides its ownincentives for foreign investment to targeted areas.

The home government, in cases, can even closethe home environment to competition.


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Home Government Tactics

Political Pressure Commercial Pressure Financial Pressure Tied Aid Gifts, Favors Defense, Arms Sales Revocation Of Laws

Visas


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Political Risk

Political risk is the probability of disruption ofoperation from political forces or events and theircorrelates.

Risk comes from instability, whether that is political,

economic, regulatory, policy oriented, judicial, andconflict oriented.


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Lowest/Highest Political Risk

United States United Kingdom Netherlands Norway Sweden Australia New Zealand

Iran Iraq North Korea Cuba Zimbabwe Afghanistan Libya


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Types of Political Risk

Ownership Risk , representing potential threats toownership from nationalization or seizure.

Operational Risk , representing threats governmentsimpose for changing the rules of the game.

Transfer Risk , represent impediments to the transferof production factors, products or capital.


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Managing Political Risk: Strategies

Minimize outright investment. Sign treaties that encourage and protect mutualinvestment.

Create settings where investment can be seized

when threatened. Avoid acquisition of national icon stature firms. Utilize host country financing. Accelerate profit repatriation. Create staggered technology transfer policies. Create local sourcing arrangements.

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Managing Political Risk: Strategies

Create alliances with powerful local partners. Utilize insurance agencies that specialize in politicalrisk.

Build political support at home and in the host

through political action, lobbying, or other proactivemeasure. Continuously monitor political and economic

development in order to prepare for changing political

risk. Remember that business is international, but allpolitics are local. Try to manage politicalrelationships at the local levels.


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The Legal Environment

Common law Civil law Theocratic law


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The Common Law System

The Common Law System originated in the UnitedKingdom, uses an independent judicial system thatrelies legislative action, judicial interpretationthrough case precedent, and application by users.

The United Kingdom, United States, Australia, andCanada are countries that utilize this system.


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The Civil Law System

The Civil Law system relies almost exclusively on alegal code that is applied universally.

Considered to be less flexible than a common lawsystem and requires frequent governmentalintervention.

Most of Continental Europe and Latin America usesthe Civil Law System.


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The Theocratic System

The Theocratic System uses religious codes tocreate a legal system.

Islamic countries frequently use a theocratic system

called a shariah. While some countries exclusivelyuse Shariah systems, like Saudi Arabia and Iran,others use a mixture of common, civil, and religiouslaw.

Examples of these countries are Malaysia,Singapore, and Indonesia.


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Legal Jurisdiction and International Business

Legal jurisdiction is the prevailing legal authorityunder which a legal case can be judged.

It is frequently very difficult to determine jurisdictionin international business as MEs are subject to laws

in all countries they operate within. This is more difficult in globalization, since it is more

and more difficult to determine the true origins ofproducts. Firms often find they are subject to more

than one jurisdiction.


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Legal Jurisdiction: Jurisdictional Levels

International, where a firm is subject to internationallaw and an international regulatory system underdevelopment.

Regional-Global, where a firm is subject to laws and

regulations of regional entities and trade blocks. National, where firms are subject to laws of nations

within which they operate. Local, where firms are also subject to local laws and

ordinances.


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Legal Issues in International Business

Product Origin laws frequently determine duties andtariffs to be paid. This is more and more difficult todetermine with globalization.

Competition laws, like antitrust regulations and

insider trading laws vary widely from country tocountry. Marketing and Distribution laws that determine

allowable practices vary widely.

Product Liability laws determine liability andallowable damages for product safety. These varywidely. /



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Treaties determine some business practices. Patent and Trademark Laws protect intellectual

property and rights to proprietary technologies.These also vary widely.

Documents

Political & Legal Environment of IB