1 Modules 4 &5 Political and Legal Environment

2 The Political Environment Political cultures provide context –Governing party’s attitude toward Sovereignty Political risk

3 Nation-States and Sovereignty “Every sovereign state is bound to respect the independence of every other sovereign state, and the courts in one country will not sit in judgment on the acts of government of another done within its territory.” - U.S. Supreme Court Chief Justice Fuller

4 Nation-States and Sovereignty Stage of Development –Protectionist laws - lesser developed –Free trade – advanced development Political and economic –Cronyism –Market vs. Non-market The ultimate resource of a government is power, and we’ve seen repeatedly that the willpower of governments can be overcome by persistent attacks from the marketplace. - Neal Soss

5 Political Risk Risk of change in political environment or government policy that would adversely affect a company’s ability to operate effectively and profitably When perceived political risk is high, a country will have a difficult time attracting foreign direct investment

6 Categories of Political Risk EIU Business Environment Risk Intelligence PRS Group World Political Risk Forecasts War Fractionalization of the political spectrum political turmoil probability Social unrest Fractionalization by language, ethnic, and/or religious groups Equity restrictions Orderly political transfer Restrictive/coercive measures required to retain power local operations restrictions Politically motivated violence Mentality (xenophobia, nationalism, corruption, nepotism) Taxation discrimination

7 Causes of Political Risk Tension between aspirations and reality Primarily occurs in lower and lower-middle income countries –Indonesia and economic crisis When political risk occurs in high income countries, it is generally due to a long- standing conflict –Northern Ireland

8 Expressions and Symptoms of Political Risk The less developed a country the greater the risk Increased economic uncertainty increases risk

9 Expressions and Symptoms of Political Risk Low High Risk Income Triad Countries Russia, Indonesia, China

10 Taxes Government taxation policies –High taxation can lead to growth in a black market Corporate taxation –Companies attempt to limit tax liability by shifting location of income

11 Seizure of Assets Expropriation – governmental action to dispossess a foreign company or investor –Compensation should be provided in a “prompt, effective, and adequate manner” –When no compensation is provided, it is called confiscation

12 Seizure of Assets Nationalization - a government takes control of some or all of the enterprises in an entire industry –Acceptable according to international law if Satisfies public purpose Includes compensation

13 Political Risks Seizure of assets (confiscation, expropriation and nationalizations) Exchange Controls Local-Content Laws Import Restrictions Tax Controls Price Controls Labor Problems Political and Local Activists Violence and Terrorism Cyberterrorism

14 Assessing Political Vulnerability Politically Sensitive Products and Issues Forecasting Political Risks

15 International Law The rules and principles that nation-states consider binding among themselves Disputes between nations are issues of public international law –Judicial arm of the United Nations –World Court or International Court of Justice (ICJ) –Handle international disputes between sovereign nations

16 Bases for Legal Systems Based on four common heritages 1.Common Law - Based on traditional practices and legal precedents set by courts (not all inclusive) Derived from English law and found in England, U.S., Canada, and countries that have been under British influence Disputes are decided by reliance on the past authority of past judicial decisions

17 Bases for Legal Systems Cont. 2.Code (Civil) Law Based on three separate codes (commercial, civil, criminal) Derived from Roman Law (an “all inclusive system”) i.e., “A person performing a contract shall do so in conformity with good faith and determined by customs and good morals ” (need broad interpretations).

18 Bases for Legal Systems Cont. 3.Islamic Law – Based on the sharia - a comprehensive code governing Muslim conduct in all areas of life –Koran–- Holy Book –Hadith Based on life, sayings, and practices of Muhammad Identifies forbidden practices “haram” Prescribes specific patterns of social and economic behavior

19 Bases for Legal Systems Cont. 4.Social Law Derived from the fundamentals of Marxist- Socialist state. Clustered around the core concepts of economic, political, and social policies of a Marxist-Socialist state.

20 Bases for Legal Systems Cont. Differences among the four legal systems are vital because the due process of law may vary considerably among these various legal systems a)Acts of God b)Prior use versus registration c)Even in countries that have the same legal system, anticipate differences d)Other

21 Written Contract Such As.. “That the parties hereby agree that the agreement is made in Arkansas, USA, and that any question regarding this agreement shall be governed by the law of the state of Colorado, USA.”

22 Conflict Resolution Litigation Formal arbitration –Settles disputes outside of court –Groups agree to abide by panel’s decision Why Litigation is Avoided Fear of unfair treatment in a foreign court Difficulty in collecting judgment that may otherwise have been collected through arbitration Relatively high cost and time Loss of confidentiality Fear of creating a poor image and damaging PR

23 Arbitration Instead of litigation, negotiating between two parties to resolve conflict situations. Settles disputes outside of court by agreeing to abide by panel’s decision An arbitration clause can be included in a contract. a)The New York Convention (over 120 countries including China) b)The Inter-American Commercial Arbitration Commission c)The International Chamber of Commerce or International Court of Arbitration in Paris (ICC) (over 100 countries) d)The American Arbitration Association (AAA) e)The Swedish Arbitration Institute of the Stockholm Chamber of Commerce f)Other centers for arbitration

24 Intellectual Property Rights Intellectual property must be registered in each country where business is conducted (Prior Use Versus Registration) –Patent – gives an inventor exclusive right to make, use, and sell an invention for a specified period of time –Trademark – distinctive mark used to distinguish it from competing products –Copyright – establishes ownership of a written, recorded, performed, or filmed creative work

25 Infringement of Intellectual Property Counterfeiting – unauthorized copying and production of a product Associative Counterfeit/Imitation – product name differs slightly from a well-known brand Piracy – unauthorized publication or reproduction of copyrighted work

26 Protecting Intellectual Property International Agreements & Intellectual Property International Convention for the Protection of Industrial Property –Paris Convention –Honored by 100 countries including U.S. –Facilitates multi-country patent registration, ensures that once a company files, it has a “right of priority” in other countries for 1 year from that date The Inter-American Convention (Latin American countries including the U.S.) Patent Cooperation Treaty European Patent Convention

27 International Conventions Cont. The Trade-Related Aspects of International Property Rights (TRIPs) agreement The most comprehensive multi-lateral agreement on intellectual property rights to date TRIP’s sets standards of protection for full range of intellectual property rights that are embodied in current international agreements. There main provisions: 1.Participating members must be compliance with minimum standards of protection by Set procedures and remedies for enforcement of intellectual property rights 3.Make disputes between WTO members with respect to TRIPs obligations subject to WTO’s dispute settlement procedures.

28 Bribery and Corruption Foreign Corrupt Practices Act (FCPA) –Requires publicly held companies to institute internal accounting controls that would record all transactions –Makes it a crime for a US corporation to bribe an official of a foreign government or political party to obtain or retain business –Prohibits payments to third parties when there is reason to believe it may be channeled to foreign officials –Also look at transparency international