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Political and Legal

Environments FacingBusiness

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To discuss different functions that political systems perform

To compare democratic & totalitarian political regimes & discusshow they can influence managerial decisions

To describe how management can formulate & implementstrategies to deal with foreign political environments

To examine major legal issues in IB

Objectives

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Political & legal Influences on International Business

EXTERNALINFLUENCES

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 managementdecisions

Formulating and

implementing political

strategies

Legal environment

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The role of the political system is to integrate the societyinto a viable, functioning unit

Influences how business is conducted

Example: the political change that resulted in Hong Kongwhen China took control in 1997 worried many managersbecause they believed that China would change therelationship btwn govt & business, with the govt exerting

more influence & control in business

The Political Environment (1)

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Political process functions

Interest articulation

Interest aggregationthe collection of interests inthe political system

Policy making Policy implementation and adjudication

The Political Environment (2)

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Basic Political Ideologies

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Political ideologya body of constructs, theories & aims thatconstitute a sociopolitical program

Example: liberal ideology of Democratic Party, conservativeideology of Republican Party in US

Pluralist societydifferent ideologies coexist because there is noone ideology accepted by all

--difficult to understand the political environment in apluralist society

Example: manager from US, where there are only 2 political

parties might find it difficult to understand the political environmentin a country where there are many different ideologies even withinthe political parties themselves

Basic Political Ideologies (1)

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Ultimate test of any political system is its ability to hold a societytogether despite pressures from different ideologies

More different & strongly held are the ideas, more difficult will befor the govt to formulate policies, acceptable to all

Example: different ideologies in countries asYugoslavia & Soviet union broke these countries apartduring 1990s

Ideologies also help bring countries together

Example: Because of strong ethnic ties btwn Taiwan & China,Nike uses Taiwanese shoe manufacturers to invest in China& to manufacture shoes using Chinese Labour

Basic Political Ideologies (2)

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Democracyinvolves wide participation by citizens in thedecision-making process

Freedom of opinion, expression, press

Limited term of elected officials

Independent and fair court system

Accessibility to the decision-making process

A Political Spectrum (1)

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Democratic governments differ:

Presidential versus parliamentary

Number of important political parties

Amount of citizen participation in decision making

A Political Spectrum (2)

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Totalitarianisma single party, individual, or group of individualsmonopolizes political power

Neither recognizes nor permits opposition

Theocraticreligious leaders are political leaders

Seculargovernment often imposes order through militarypower

A Political Spectrum (3)

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Impact of the Political

System on Management Decisions

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Political Riskcaused by political instability

Promotes fear that operating position will deteriorate

Tends to be higher in totalitarian regimes

Other ways also by which political risk can affect a company

Example: During the period of apartheid in South Africa, manyUS companies with investment in South Africa faced boycottsin US by groups that were morally opposed to apartheid

Impact of the Political Systemon Management Decisions (1)

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Causes of political risk

Change in the opinions of political leadership

Civil disorder stemming from economic conditions, human

rights violations, or group animosityExample: In Argentina, in 2001, during the height of itseconomic crisis, when govt froze withdrawals from bankaccounts to prevent complete depletion of cash from thebanking sector, groups of street protestors & rioters targeted &

attacked many foreign owned banks

External relationsanimosity between host country andforeign investors country

Impact of the Political Systemon Management Decisions (2)

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Types of political risk

Micropolitical actions are aimed at specific foreigninvestments

Example: after US bombing of Afghanistan in October 2001,anti- American protestors in Afghanistan burned a KFCrestaurant, McDonalds restaurant & a Shell gas station

Macropolitical actions affect a broad spectrum of foreigninvestors

Example: after the communist revolution in Cuba, the takeover

of property was aimed at all foreign investors regardless ofindustry or nationality

Impact of the Political Systemon Management Decisions (3)

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Formulating and Implementing

Political Strategies

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Formulating political strategies is even more complicatedthan formulating competitive marketplace strategies

Managers must know how decisions are made that couldinfluence their ability to operate

Managers must also know the rules for influencingpolitical decisions

Formulating and ImplementingPolitical Strategies (1)

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Establishing a political strategy in the host country

Identify the issue

what is the specific issue facing a firm- trade barriers,environmental standards, workers right?

Define the political aspect of the issue

does the govt feel strongly about the issue, or is it of minimalconcern?

Is there a political dimension to the issue or can it be dealtoutside the scope of politics?

Formulating and ImplementingPolitical Strategies (2)

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Assess the potential political action of other companiesand special-interest groups

Who are the parties that are affected & able togenerate political pressure?

What are their strategies likely to be?

Identify important institutions and key people

Are they regulatory agencies, courts, legislatures?

Formulating and ImplementingPolitical Strategies (3)

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Formulate strategies

What are the key objectives, major alternatives & likelyeffectiveness of alternative strategies?

Determine the impact of implementation

What will be the public reactions in the home & hostcountries if the action taken is unpopular?

Select the most appropriate strategy and implement

Formulating and ImplementingPolitical Strategies (4)

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Legal environment

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Managers must be aware of:

Legal systems in countries in which they operate

Degree of independence of judiciary from politicalprocess

Legal environment

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Affects many aspects of IB

National laws may affect both domestic & foreign companiesoperating within the countrys borders

health and safety standards

employment practices

antitrust prohibitions

contractual relationships

environmental practices

patents and trademarks

Example: the maximum workweek in Thailand is 84 hours &that applies to domestic & foreign firms

Legal Issues in International Business (1)

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May govern cross-border activities

investment of capital

payment of dividends to foreign investors

customs and duties on imports

Legal Issues in International Business (2)