4.03 Understand the different types of political and legal systems

Political systems Sets the laws under which businesses operate Sovereign states - what most countries consider themselves - free from external control Protectorates - under partial control of larger country US protectorates include Guam, US Virgin Islands, Puerto Rico & American Samoa. Aruba - protectorate of The Netherlands. British Virgin Islands - protectorate of Great Britain

Political systems (con’t) Over past 30 years - strong movement toward democracy worldwide - 62% of countries have democracies YouTube clip on Democracy being possible

Types of political systems Democracy - allows for direct elections by country’s citizens Practiced in ancient Athens 5th century B.C. - only allowed direct voting by small percentage of population Elections must be both free & fair to be democratic

Types of political systems (con’t) Republic - citizens elect representatives who, in turn, vote on laws. Roman empire was first republican form of government Most democracies (such as the US) operate under this form YouTube clip on difference between democracies and republics.

Types of political systems (con’t) One-party state - allow only 1 political party. Ex) Communism in Cuba, North Korea & Vietnam Mexico - 1 state for 70 years until 2003, & now multi-party democratic system. Capitalism and Socialism youtube

Types of political systems (con’t) Theocracy - religion or faith plays dominant role in government. Often religious leaders have direct role in controlling government actions. Ex) Iran, Saudi Arabia & Vatican City

Political risk Uncertainty about stability of political or legal system Change in system can result in uncertainty. Can result in voiding of contracts, nationalization of property. Multi-party democracy proven - highly stable form of government. One-party states & theocracies can see business activities as threat to power. Chance for corruption increases

Political risk (con’t) International marketers deal with political risk by increasing amount of information collected on country & leaders. Must develop contingency plans in case of political change. Businesses should act as good corporate citizens by following laws & customs of country Businesses can purchase political risk insurance to protect assets or profits.

Political economy movement General shift to democratic mixed economies China & Russia began shift after 1990 Russian citizens struggle with obtaining wealth & many often vote to return to more command economy. China has maintained 1- party state, but allowed for some economic reform.

Political economy movement (con’t) Activity***

Political economy movement (con’t) Not all countries see democratic mixed economies as ideal system. Many developing countries in danger of moving from democracies to one-party states under planned economies. Leaders in some theocracies claim democracy & free markets = Western ideas; should not be followed

Political economy movement (con’t) Latin American countries have some of most unequal income distributions in world. Inequality has created political problems Voting poor in democracies elect leaders willing to move away from free-market economies. Situations can lead to political instability & economic uncertainty. Ex) Chavez in Venezuela & Morales in Bolivia YouTube clip, Chavez’ criticizing US & Bush YouTube clip of Morales criticizing US & capitalism

Legal systems Creates, interprets & enforces laws of country. International marketers concerned about nature of laws of legal system & how well laws enforced. Statutory law- systems attempt to put every possible legal issue into specific law Case law - based on British common law. US & other countries influenced by Great Britain often have this system.

Legal systems (con’t) Corruption - misuse of official position for 1’s own benefit. Countries rated on level of corruption, 10 = highly clean & 0 = highly corrupt (according to Transparency International) Sweden, Singapore, Denmark, Finland & New Zealand rated least corrupt. Iraq, Somalia, Afghanistan & Myanmar (Burma) rated most corrupt. US - 22nd with 7.1 rating ces/cpi/2010/results Transparency International corruption results ces/cpi/2010/results Major problem for international businesses in countries with weak legal systems.

Legal systems (con’t) Contract Law Contract - any legally enforceable promise or set of promises made by 1 party to another. Contracts lower risks of doing business by stating each party’s responsibilities. Weak contract enforcement can hinder business operations Transactions may need to be cash instead of credit. May be fear of selling internationally because of lack of copyright & patent enforcement

Legal systems (con’t) Development of free trade areas helps businesses operate internationally Trading regions unify their legal systems & set regulations for enforcement of contracts. Ex) Business can patent product in one European country & the patent will be enforced throughout EU.

Legal systems (con’t) Sustainability - worldwide movement allows economic development while minimizing negative impacts on environment. YouTube clip on sustainability Green laws enacted by many countries for business conduct & sustainability Ex) Germany requires manufacturers to take products back for recycling when product no longer used. Ex) Company that sells computers is responsible for collecting & recycling computer when no longer needed

Legal systems (con’t) Kyoto Protocol - set of agreements on global air pollution designed to limit global warming. Over 140 countries have signed UN sponsored treaty. US one of lone major holdouts, refusing to sign treaty. Lessens impact on companies doing business in US, Any company engaged in business in another country will have to abide by treaty.