International Business Chapter 3 The Political and Legal Environments Facing Business Bennett Jesslyn Kezia Valencia

Cultural Influences on International Business EXTERNAL INFLUENCES OPERATIONS OBJECTIVES PHYSICAL AND SOCIAL FACTORS Political policies and legal practices Cultural factors Economic forces Geographical influences Political ideologies Political Risk Legal environment Operational and strategic legal issues STRATEGY COMPETITIVE ENVIRONMENT MEANS

The Political Environment The goal of the political system is to integrate the society Political process functions: Interest articulation Interest aggregation Policy making Policy implementation and adjudication

Basic Political Ideologies Political ideology— a body of constructs, theories, and aims that constitute a sociopolitical program Pluralist society — different political groups champion competing ideologies. Ideologies also help bring countries together In Pluralism, it requires managers assess the interaction among groups. The impact of ideological differences on national boundaries When operating in a foreign country, must understand the potential sources of political tension and instability.

The Political Spectrum Reactionary Conservative Liberal Radical Authoritarian Fascist Communist Democratic Government Nondemocratic Government Democracy Totalitarianism

A Political Spectrum Democracy—involves wide participation by citizens in the decision-making process Freedom of opinion, expression, press, and freedom to organize Election of political representatives Limited term of elected officials Independent and fair court system Nonpolitical bureaucracy and defense infrastructure Accessibility to the decision-making process Democratic governments differ Presidential versus parliamentary Number of important political parties Amount of citizen participation in decision making Fragility and stability of new democracies Democracy believed to be the best form of government

A Political Spectrum Totalitarianism— a single party, individual, or group of individuals monopolizes political power Neither recognizes nor permits opposition Theocratic —religious leaders are political leaders Secular —government often imposes order through military power Totalitarianism takes several forms Fascism —desires to control people’s minds and souls, converting them to its own faith Authoritarianism —desires to control the people Communism —political and economic systems are virtually inseparable equal distribution of wealth government ownership and control of resources

Impact of the Political System on Management Decisions Political Risk—caused by political instability Promotes fear that operating position will deteriorate Tends to be higher in totalitarian regimes Causes of political risk Change in the opinions of political leadership Civil disorder stemming from economic conditions, human rights violations, or group animosity External relations —animosity between host country and foreign investor’s country Types of political risk Micro —political actions are aimed at specific foreign investments Macro —political actions affect a broad spectrum of foreign investors

Government Intervention in the Economy Individualistic paradigm Belief in minimal government intervention in the economy Likely to be democratic and economically free Promotes marketplace competition regulates marketplace when competition by itself is unreliable or unacceptable Communitarian paradigm Government tends to be prestigious thrives on a respected, centralized bureaucracy May be democratic or authoritarian stable political party or coalition in power Government may start partnership with business Government action toward business is not always consistent

Formulating and Implementing Political Strategies Establishing a political strategy in the host country Identify the issue Define the political aspect of the issue Assess the potential political action of other companies and special-interest groups Identify important institutions and key people Formulate strategies Determine the impact of implementation Select the most appropriate strategy and implement Implementing a strategy—marshal whatever resources necessary to accomplish the company’s goals Lobbyists educate and persuade government decision makers Enlist support of consumers

Kinds of Legal Systems Common law—based on tradition, precedent, custom, and usage Interpretation by the courts Civil law—codified legal system Based on a detailed set of laws that make up a code Rules for business transaction included Based on how the law is applied to the facts Theocratic law—based on religious precepts e.g., Islamic law has remained frozen moral rather than commercial law intended to govern all aspects of life Consumer safeguards—differ in different legal systems Deal with product liability issues

The Legal Profession Lawyers and their firms Vary among countries in terms of how they practice law and serve clients Most firms are quite small Firms have expanded abroad in order to serve their clients large legal firms often created through mergers or correspondent relationships with firms in other countries Legal staffs have to understand local laws and practices

Legal Issues in International Business Affect many aspects of IB National laws May affect both domestic and foreign companies operating within the country’s borders health and safety standards employment practices antitrust prohibitions contractual relationships environmental practices patents and trademarks May govern cross-border activities investment of capital payment of dividends to foreign investors customs and duties on imports

Case Study The House of people’s representative (DPR) and People’s consultative assembly (MPR) was controlled by the Kabinet Merah Putih which results in the fall of Indonesia’s shares. The US Dollars had hit Rp 13,000 and Rupiah experienced depreciation against US Dollars.