1 Chapter 4 Politics and Law

2 Learning Objectives To understand the importance of the political and legal environments in both the home and host countries to the international business executive. To learn how governments affect business through legislation and regulations. To see how the political actions of countries expose firms to international risks. To examine the differing laws regulating international trade found in different countries. To understand how international political relations, agreements, and treaties can affect international business.

3 A Look at Three Segments The Home-Country Perspective Host Country Political and Legal Environment International Relations and Laws

4 The Home Country Perspective Major areas of governmental activity that are of concern to the international business manager: Embargoes and Sanctions Export Controls Regulation of International Business Behavior

5 Sanctions and Embargoes Governmental actions that distort free flows of trade in goods, services, or ideas for adversarial and political, rather than economic, purposes. Sanctions tend to consist of specific coercive trade measures. Embargoes are typically broader in that they prohibit trade entirely.

6 Export Controls Are designed to deny or delay the acquisition of strategically important goods by adversaries. The legal basis for export controls varies in nations. Most international business can be carried out under NLR conditions. Export licenses are issued by the Dept. of Commerce for commodities whose export is considered sensitive.

7 How an Export License is Issued Specialists in the Department of Commerce match the exported commodity with the Critical Commodities list, the country of destination, and the recipient company. If no concerns exist in any one of the three areas, a license is issued. This process is only carried out if the product or the recipient country is considered sensitive.

8 A New Environment for Export Controls Focus of export controls on the Third World A loosening of mutual bonds among allied nations The increased foreign availability of high- tech products The speed of change and the rapid dissemination of information and innovation around the world The issue of equipment size

9 Implementation and Enforcement of Export Controls Export controls are increasingly difficult to implement and enforce. The number of countries that are able to manufacture products of strategic importance has increased. Products that are in need of control are developed and disseminated very quickly. It is difficult to control the transfer of technology and know-how.

10 Regulation of International Business Behavior Regulations on firms varies substantially among nations. Nations may employ boycotts to govern business activities. Antitrust Laws are a regulatory activity.

11 Bribery Firms operating abroad are affected by laws against bribery and corruption. International businesses may bribe to counterbalance poor product quality, to create a market for goods, or to stay competitive with other firms that bribe.

12 Host Country Political Action and Risk Varies widely from country to country Economic Risk Less dangerous, but more common

13 Three Types of Political Risk Ownership Risk Exposes property and life Operating Risk Interference with the ongoing operations of a firm Transfer Risk Limitations on the outflow of funds

14 Political Risk May Involve Confiscation The government takeover of a firm without compensation to the owners. Expropriation A form of government takeover in which the firm’s owners are compensated. Domestication The government demands transfer of ownership and management responsibility.

15 Economic Risk Exchange controls may be levied Tax policies may be used to control corporations and their capital Price controls may employed to control prices of imported products or services

16 Managing the Risk Demonstration of concern with host country’s society can be effective. Firms can take out insurance to cover losses due to political and economic risk.

17 Legal Differences and Restraints Countries differ in their laws as as well as in their use of the law. There are two major legal systems worldwide: Common Law: Based on tradition and dependent upon precedent and custom. Code Law: Based on a comprehensive set of written statutes.

18 International Relations and Laws International Politics:The effect of politics on international business is determined by both the bilateral political relations between home and host countries and by multilateral agreements governing the relations among groups of countries. International Law:Plays an important role in the conduct of international business. Treaties and agreements have a strong influence on international business operations.

19 International Law The World Trade Organization defines internationally acceptable economic practices for its member nations. The Patent Cooperation Treaty (PCT) provides procedures for filing patent applications. The United Nations has developed codes and guidelines that affect international business.

20 In cases of disagreement, the parties can choose: Arbitration: Procedures are quicker and often spelled out in the original contract Litigation: Often involves extensive delays and is very costly