Session

Political – Legal Environment

Topic Outline

Political Systems Tax Incentives Intellectual Property Political Risks Legal Systems Government Policy

This Session Weekly Activity: The World Factbook What foreign market(s) will the

company enter? Analysis of local demand, availability

of resources Existing and potential competition,

tariff rates, currency stability, investment barriers

What expenditures are required to enter a new market?

What is the best way to organize overseas operations?

Good starting point for research: CIA’s World Factbook

Country Attractiveness

Figure 2.1: Country Attractiveness

BenefitsSize of Economy

Likely Economic Growth

CostsCorruption

Lack of InfrastructureLegal Costs

RisksPolitical Risks: Social Unrest/Anti-Business Trends

Economic Risks: Economic MismanagementLegal Risks: Failure to Safeguard Property Rights

OverallAttractiveness

Key Influences in the Global Marketing Environment

The International Trade System

Economic Environment

Political-Legal Environment

Cultural Environment

Political-Legal Environment

Attitudes Toward International Buying

Government Bureaucracy

Political Stability

Monetary Regulations

Attitudes toward international buying Government bureaucracy Political stability Monetary regulations

Countertrade Barter Compensation Counterpurchase

Political-Legal Environment

Legal Systems Rules - laws - that regulate behavior

Processes through which laws are enforced & grievances are redressed

International Laws Home Country Laws Host Country Laws

Main types of legal systems Common law Civil law (code law) Theocratic law (islamic law) Social Law

Legal/Regulatory Environment

Complex and confusing◦ MNCs must

Conform to national laws and standards Abide by the laws of their own countries Be aware of international treaties and

obligations◦ Differences in regulatory regimes

Increase transaction costs Restrict and distort trade Can result in retaliatory practices or sanctions

Jurisdiction

Not usually automatic European Court of Justice The International Court of Justice

MEDIATIONMEDIATION ARBITRATIONARBITRATION

Independent Third Party

Independent Third Party

Non-binding Binding

Political Environment Rapid and uncertain change

◦ China’s transition to a market economy◦ European expansion and integration◦ Russia’s unstable political institutions◦ The emergence of political Islam in the

Middle East Significant differences across countries

◦ Less stable governments increase political risk

◦ Uncertain responses to democratization Change in government policies

◦ Adjusting to adjust to new perspectives and changing requirements

◦ Assessing political risks

Political Environment At the basis of international law and

international relations: sovereignty (self determination and independence

from external interference) International trade limits sovereignty Governments can invoke sovereignty and

jeopardize firm’s operations

Impact on Government

Positive effects Increased

economic development

Expanded infrastructure

Transfer of modern management techniques

Greater interdependence among business partners

Negative effects MNC power increased MNCs externalize cost

to countries Competition results in

too many concessions MNCs influence local

policies Companies incorporate

in low tax countries Pressure to reduce

social benefits

Political System

Political system includes the structures, processes, and activities by which a nation governs itself.

Political systems can be assessed according to two dimensions

Degree to which they emphasize collectivism as opposed to individualism

Degree to which they are democratic or totalitarian

Political Participation

Who participates in them And

What extend they participate

Wide participation occurs when people capable of influencing the political system make an effort to do soNarrow participation occurs when few people participate

Both private and public Both private and public groups need to balancegroups need to balance

each other’s powereach other’s power

Every aspect ofpeople’s lives must be

controlled to preserve order - No individual liberties

Only individuals andOnly individuals andprivate groups canprivate groups can

preserve personal libertiespreserve personal liberties

TotalitarianismTotalitarianism AnarchismAnarchismPluralismPluralism

Political Ideologies

Political Ideologies

Most modern societies are pluralistic politically Arise due to differences in languages, ethnic

background, tribal groups or religions

Topic Example Video

The following video explains the different type of political systems.

Take note of the key points. http://www.youtube.com/watch?v=Hu1-JPLYTA

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Types of Political Systems

Democracy—all citizens take part in making the rules that govern them

Totalitarianism—political control is held by one person or a small group

Mixed systems—characteristics of both systems

The Political Spectrum

AuthoritarianFascist

Communist

Liberal

Conservative

TotalitarianismDemocracy DemocraticGovernment

Nondemocratic Government

Indicators of Political Rights

Degree to which fair and competitive elections occur

Ability of voters to endow representatives with real power

Ability to organize political parties Existence of safeguards on the rights of

minorities

Indicators of Civil Liberties

Existence of freedom of the press Equality under the law for all individuals Extent of personal social freedoms Degree of freedom from extreme

governmental indifference or corruption

Comparative Measures of Freedom

POLITICAL RIGHTS

CIVIL LIBERTIES

Partly FreeNot Free Free

Global Trends in Freedom

Democracy

Freedom of opinion, expression, press and organization

Elections Limited terms for elected officials Independent court system

High regard for individual rights Respect for property

Nonpolitical bureaucracy and defense infrastructure

Accessibility to the decision-making process

Totalitarianism

Typically theocratic or secular Opposite end of the political spectrum from

democracy Order is often imposed through military power Single party, group, or individual monopolizes

political power Lack of constitutional guarantees Neither recognizes nor permits opposition Fascism Authoritarianism (tribal, right-wing) Communism/ socialism

States in Transition

The political environment of the world has changed radically since the late 1980’s

A wave of democratic revolutions has swept the world

The Spread of Democracy

Topic Example Video

The following video discusses international risks and it’s impact on international organisations.

Take note of the key points. http://www.youtube.com/watch?v=E-ZltoEPKoY

Political Risks in International Business

Trade sanctions Expropriation Economic nationalism Civil unrest or war

Political Risk

Evaluating political risk: Business periodicals (The Economist, WSJ)

Commercial sources (EIU, Chase, RUNDT’s) Political risk signals

Poor economic performance Repression of ethnic groups and/or general

repression by the elite Internal diversity and incongruent interests Radically changing government structures Fierce nationalist sentiment

Topic Example Video

The following video explains what is Political Risk.

Take note of the key points. http://www.youtube.com/watch?v=19Elo8Y41

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Political Risk, continued

Risks related to government trade policies• Tariffs, exchange-rate controls, quotas, export/import

license requirements, and other trade barriers Risks related to government economic policy

• Controlling foreign investment through taxes or transfer of assets from company to local ownership:

- Confiscation- Expropriation- Nationalization- Creeping expropriation- Domestication

Risks related to labor and action groups Risks related to terrorism

Political Risks for International Business

Political Risk—caused by political instability• Promotes fear that operating position will deteriorate• Tends to be higher in totalitarian regimes

Sources of political risks Unstable Political System Political involvement of religious or military

leader Frequent changes in government Corrupt or poor leadership Civil disorder due to:

Economic conditions Human rights violations Conflict among races, religions & etnics Group animosity

Topic Example Video

The following video explains about the effects of political risk on international business.

Take note of the key points. http://www.youtube.com/watch?v=-EJ8TZYvad

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Can cause: Procurement difficulties Work stoppages Shipment delays Property damage

Types of political risk Micro—political actions are aimed at specific

foreign investments Eg; Pakistan, France

Macro—political actions affect a broad spectrum of foreign investors

Eg; Cuba

Political Risks for International Business

Types of Political Risk

Local Contentrequirements

PolicyChanges

PropertySeizure

Terrorism &Kidnapping

Conflict &Violence

PoliticalRisks

Arises from:Arises from:

People’s resentment toward government

Territorial disputes between nations

Ethnic, racial or religious disputes

Reduces ability to:Reduces ability to:

Obtain materials and equipment

Manufacture and distribute products

Protect employees’ lives and firm’s assets

Conflict and Violence

Terrorism and Kidnapping

Kidnapping and other terrorist activities are means of making political statements.

Kidnapping and the taking of hostages may be used to fund a terrorist group’s activities. Executives of large international companies are prime targets.

Fly non-stop when possible and avoid unsecured areas of airports

During your stay, vary your routines and means of transportation

Keep a low profile and refrain from loud, flashy behavior

Give friendly but cautious answers to personal questions

Know local emergency procedures before trouble strikes

Security checklist for managers on business abroad:

Terrorism and Kidnapping

Property Seizure

ConfiscationThe forced transfer of assets

from a companyto the government without

compensation

ExpropriationThe forced transfer of assets

from a company to the government with compensation

NationalizationWhen expropriation involves

one or a small number of companies in an industry, the government may take

over an entire industry

Policy changes restrict:

Policy Changes

• Foreign ownership

• Investment levels

• Business activities

Local Content Requirements

Laws stipulating that a specified amount of a good or service be supplied by producers in the domestic market. These requirements can force companies to use locally available raw materials, procure parts from local suppliers, or employ a minimum number of local workers.

Managing Political Risk

InfluencingLocal

Politics

InformationGathering

Adaptation

Avoidance

Risks

AdaptationAdaptationIncorporate risk intoIncorporate risk intobusiness strategiesbusiness strategies

AdaptationAdaptationIncorporate risk intoIncorporate risk intobusiness strategiesbusiness strategies

LocalizationLocalization

Development assistanceDevelopment assistance

Local equity / debtLocal equity / debt

InsuranceInsurance

PartnershipsPartnerships

Managing Political Risk

Agencies specializingAgencies specializingin political-risk servicesin political-risk services

Current employeesCurrent employeeswith relevant informationwith relevant information

Information gatheringInformation gatheringGather data to betterGather data to better

predict and manage riskpredict and manage risk

Information gatheringInformation gatheringGather data to betterGather data to better

predict and manage riskpredict and manage risk

Managing Political Risk

CorruptionCorruptionForeign Corrupt Practices Act

LobbyingLobbyingInfluencing local lawmakers

Influence local politicsInfluence local politicsPresent firm’s viewsPresent firm’s viewson political matterson political matters

Influence local politicsInfluence local politicsPresent firm’s viewsPresent firm’s viewson political matterson political matters

Managing Political Risk

Minimizing Political Risk

Understand both ruling and opposing parties; remain politically neutral

Be exemplary corporate citizens Sell a quality product or service that is essential

for local development Partner with local companies and create local

expertise Use local suppliers Obtain insurance coverage against

expropriation, nationalization, confiscation, and terrorism

Contract Law

Contract law is the body of law that enforces a contract Specifies conditions under which an exchange is to

occur Details rights and obligations of parties

Dispute resolution is often complex Where to arbitrate and whose laws apply? Validity of contracts and decisions

Role of United Nations Convention on Contracts for the International Sale of Goods (CIGS)

Corruption as of 2004Figure 2.1: Rankings of Corruption by Country

2004

0 2 4 6 8 10

Bangladesh

Nigeria

Indonesia

Zimbabw e

Russia

India

China

Brazil

Italy

Malaysia

France

United States

United Kingdom

New Zeland

Finland

Corruption Index (10=clean; 0=totally corrupt)

Topic Example Video

The following video outlines the top 10 corrupt countries in the world.

Take note of the key points. https://www.youtube.com/watch?v=QQGcNBkF

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Product Safety and Liability Product safety laws set safety standards for

products and manufacturing processes Product liability laws hold the firm and its

officers responsible for product safety standards

Criminal laws/ civil liability laws Civil laws call for payment and monetary damages Criminal liability laws result in fines or imprisonment

Other Legal Issues for International Businesses

Worker relations Health and safety standards Workweek

Employment practices Antitrust prohibitions Environmental practices Patents, trademarks, and intellectual property

protection Taxes and reporting requirements

Topic Example Video

The following video focuses on the need for transparency to combat corruption in international business.

Take note of the key points. http://www.youtube.com/watch?v=_b2jCqWk2

CM

Government Activities Influence Business

Laws that protect workers and consumers

Trade barriers Tariffs Quotas Boycotts Licensing requirements

International Taxes

Customs duty Sales tax Excise tax Payroll-related tax Value-added tax (VAT) Income taxes

Political Strategies for International Businesses

Identify the exact issue Trade barrier? Environmental standards? Workers rights, etc?

Define/determine the political aspect of the issue Assess the potential political action of other

companies Identify important institutions and individuals Formulate strategies

Key objectives Alternatives Probable effectiveness

Political Relations with Host and Home Countries

Global companies operating in host countries

Global companies’ relationships with home countries

Personal behavior in accordance with rules or Personal behavior in accordance with rules or standards for right conduct or moralitystandards for right conduct or morality

Ethical relativismEthical relativismWhen in Rome,

do as the Romans

Ethical relativismEthical relativismWhen in Rome,

do as the Romans

Ethical absolutismEthical absolutismImport ethics

from home

Ethical absolutismEthical absolutismImport ethics

from home

Enron

Tyco

Worldcom

Parmalat (Italy)

Ethical Behavior

Topic Example Video

The following video is a brief interview with Michael Czinkota about ethics in international business.

Take note of the key points. http://www.youtube.com/watch?v=iCUwosYSVi

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Respect consumers’ rightsRespect consumers’ rights

Guard workers’ rightsGuard workers’ rights

Protect the environmentProtect the environment

Preserve employmentPreserve employment

Encourage developmentEncourage development

Improve healthImprove health

Support educationSupport education

Go beyond legal obligations to balance commitments to investors, customers, communities and other companies

Social Responsibility

Stable business environments

Improved business communications

Efficient distribution systems

Prompt and equitable dispute resolution

Expanded opportunities

Diminished risk levels

Favorable international political relations foster:

International Relations

Encouraging International Business

Free-trade zones Most favored nation (MFN) Free-trade agreements Common markets

Tax Incentives

Corporate tax deduction on income earned by foreign subsidiaries

Double-taxation avoidance treaties Tax holiday

Government Policy and FDI

The radical view: inbound FDI harmful; MNEs Are imperialist dominators Exploit host to the advantage of home country Extract profits from host country; give nothing back Keep LDCs backward and dependent for investment,

technology and jobs The free market view: FDI should be encouraged

Adam Smith, Ricardo, et al: international production should be distributed per national comparative advantage

An MNE increases the world economy efficiency Brings to bear unique ownership advantages Adds to local economy’s comparative advantages

Government Policy and FDI

Home country Outward FDI encouragement

Risk reduction policies (financing, insurance, tax incentives)

Outward FDI restrictions National security, BOP

Host country Inward FDI encouragement

Investment incentives Job creation incentives

Inward FDI restrictions Ownership extent restrictions (national security; local

nationals can safeguard host country’s interests

Intellectual Property Rights

Intellectual property refers to property that is the product of intellectual activity

Intellectual property laws are a very important stimulus to innovation and creative work

Protection of intellectual property rights differs greatly from country to country

Topic Example Video

The following video outlines the issues of intellectual property rights in an international context.

Take note of the key points. http://www.youtube.com/watch?v=B3HHeyM1

KQM

Piracy of Intellectual PropertyFigure 2.2: Regional Piracy Rates for Software

0 20 40 60 80

North America

Western Europe

Middle East and Africa

Latin America

Asia Pacific

Eastern Europe

Percentage of Software that is Pirated

Intellectual Property Rights Violation of intellectual property

rights is the most significant threat to the competitiveness of international corporations.

Losses attributed to the violation of intellectual property rights are estimated to be $60 billion a year.

Intellectual Property Protection

Patent Protection of the rights of the inventor or of the firm to

use and sell the invention for a specified period of time Copyright

Rights of owner of original work of art to reproduce, sell, perform, or film the work

Trademark Brand name, mark, symbol, motto, or slogan that

identifies a brand and distinguishes it from competitors’ brands

Trade Secret Know-how, formulas, and special blends that are not

registered and are thus not protected by law

Factors Influencing Intellectual Property Violations

Lack of appropriate legislation Lax enforcement Unavailability of authentic products High prices for authentic products that limit their

accessibility to local consumers Cultural Factors

• Values that perceive imitation as a form of flattery • Feelings of interpersonal distrust and not getting fair

deal• Emphasis on material wealth • Belief that technology is common domain

Countries that join the World Trade Organization must sign on to the TRIPS agreement (Trade-Related Aspects of Intellectual Property Rights)

International conventions have been gaining strength

Developed countries are lending support to emerging countries

Protecting Intellectual Property

Home Country Legislation

ANTITRUST LAWS Prevent anticompetitive activities

such as the creation of monopolies and cartels

CORRUPTION LAWS Prevent multinational corporations

from using unethical means to obtain competitive advantage in a particular market

Foreign Corrupt Practices Act makes it illegal to bribe politicians

Next Session Weekly Activity: Political Risk Discuss this potential dilemma: “High political risk requires organisations to

seek a quick payback on their investments. Striving for a quick payback, does have it’s dangers”.

Consider how this practice could expose businesses to charges of exploitation.

Could this result in increased political risk. Justify your argument with examples.

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