Political & Legal Environment

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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)