1. Political – Legal Environment
Session
Political – Legal Environment

2. Topic Outline Political Systems Tax Incentives Intellectual Property
Political Risks
Legal Systems
Government Policy

3. 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

4. Country Attractiveness
Benefits In the most general sense, the long-run monetary benefits of doing business in a country are a function of the size of the market, the present wealth (purchasing power) of consumers in that market, and the likely future wealth of consumers. International businesses need to be aware of this distinction, but they also need to keep in mind the likely future prospects of a country. In 1960 South Korea was viewed as just another impoverished Third World nation. By 2003 it was the world’s 11th largest economy, measured in terms of GDP. By identifying and investing early in a potential future economic star, international firms may build brand loyalty and gain experience in that country’s business practices. In contrast, late entrants may find that they lack the brand loyalty and experience necessary to achieve a significant presence in the market. In the language of business strategy, early entrants into potential future economic stars may be able to reap substantial first-mover advantages, while late entrants may fall victim to late-mover disadvantages. (First-mover advantages are the advantages that accrue to early entrants into a market. Late-mover disadvantages are the handicap that late entrants might suffer from.)
Costs A number of political, economic, and legal factors determine the costs of doing business in a country. With regard to political factors, the costs of doing business in a country can be increased by a need to pay off the politically powerful to be allowed by the government to do business. With regard to economic factors, one of the most important variables is the sophistication of a country’s economy. It may be more costly to do business in relatively primitive or undeveloped economies because of the lack of infrastructure and supporting businesses.As for legal factors, it can be more costly to do business in a country where local laws and regulations set strict standards with regard to product safety, safety in the workplace, environmental pollution, and the like (since adhering to such regulations is costly). Also, local laws that fail to adequately protect intellectual property can lead to the “theft” of an international business’s intellectual property, and lost income.
Risks As with costs, the risks of doing business in a country are determined by a number of political, economic, and legal factors. Political risk has been defined as the likelihood that political forces will cause drastic changes in a country’s business environment that adversely affect the profit and other goals of a business enterprise. Social unrest can result in abrupt changes in government and government policy or, in some cases, in protracted civil strife. On the economic front, economic risks arise from economic mismanagement by the government of a country. Economic risks can be defined as the likelihood that economic mismanagement will cause drastic changes in a country’s business environment that hurt the profit and other goals of a particular business enterprise. When legal safeguards are weak, firms are more likely to break contracts and/or steal intellectual property if they perceive it as being in their interests to do so. Thus, legal risks might be defined as the likelihood that a trading partner will opportunistically break a contract or expropriate property rights.
Overall Attractiveness The overall attractiveness of a country as a potential market and/or investment site for an international business depends on balancing the benefits, costs, and risks associated with doing business in that country.

5. Key Influences in the Global Marketing Environment
The International Trade System
Economic Environment
Political-Legal Environment
Cultural Environment

6. Political-Legal Environment
Attitudes Toward International Buying
Government Bureaucracy
Political Stability
Monetary Regulations

7. Political-Legal Environment
Attitudes toward international buying
Government bureaucracy
Political stability
Monetary regulations
Countertrade
Barter
Compensation
Counterpurchase

8. 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
The legal system of a country is of immense importance to international business. A country’s laws regulate business practice, define the manner in which business transactions are to be executed, and set down the rights and obligations of those involved in business transactions. Like the economic system of a country, the legal system is influenced by the prevailing political system (although it is also strongly influenced by historical tradition). The government of a country defines the legal framework within which firms do business—and often the laws that regulate business reflect the rulers’ dominant political ideology.

9. 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

10. Independent Third Party
Jurisdiction
Not usually automatic
European Court of Justice
The International Court of Justice
MEDIATION
ARBITRATION
Independent Third Party
Non-binding
Binding

11. 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

12. 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

13. Impact on Government Positive effects Negative 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

14. 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

15. 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 so
Narrow participation occurs when few people participate

16. Political Ideologies Totalitarianism Anarchism Pluralism
Both private and public
groups need to balance
each other’s power
Every aspect of
people’s lives must be
controlled to preserve order
- No individual liberties
Only individuals and
private groups can
preserve personal liberties
Totalitarianism
Anarchism
Pluralism

17. Political Ideologies Most modern societies are pluralistic politically
Arise due to differences in languages, ethnic background, tribal groups or religions

18. Topic Example Video
The following video explains the different type of political systems.
Take note of the key points.

19. 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

20. The Political Spectrum
Totalitarianism
Democracy
Authoritarian
Conservative
Fascist
Democratic
Government
Nondemocratic
Government
Liberal
Communist

21. 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

22. 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

23. Comparative Measures of Freedom
POLITICAL RIGHTS
Not Free
Partly Free
Free
CIVIL LIBERTIES

24. Global Trends in Freedom

25. 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

26. 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

27. 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

28. The Spread of Democracy
Map 2.5 – Political Freedom, 2004, p. 69

29. Topic Example Video
The following video discusses international risks and it’s impact on international organisations.
Take note of the key points.

30. Political Risks in International Business
Trade sanctions
Expropriation
Economic nationalism
Civil unrest or war

31. Political Risk Evaluating political risk: Political risk signals
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

32. Topic Example Video
The following video explains what is Political Risk.
Take note of the key points.

33. 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

34. 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

35. Topic Example Video
The following video explains about the effects of political risk on international business.
Take note of the key points.

36. Political Risks for International Business
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

37. Types of Political Risk

38. Conflict and Violence Arises from: Reduces ability to:
People’s resentment
toward government
Territorial disputes
between nations
Ethnic, racial or
religious disputes
Obtain materials
and equipment
Manufacture and
distribute products
Protect employees’ lives
and firm’s assets

39. 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.

40. Terrorism and Kidnapping
Security checklist for managers on business abroad:
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

41. Property Seizure 1 2 3 Confiscation
The forced transfer of assets from a company to the government without compensation
Expropriation
The forced transfer of assets from a company to the government with compensation
Nationalization
When expropriation involves one or a small number of companies in an industry, the government may take over an entire industry 1 2 3

42. Policy changes restrict:
Foreign ownership
Investment levels
Business activities

43. 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.

44. Managing Political Risk
Avoidance
Influencing Local Politics
Risks
Adaptation
Information Gathering

45. Development assistance
Managing Political Risk
Localization
Development assistance
Local equity / debt
Insurance
Partnerships
Adaptation
Incorporate risk into
business strategies

46. Managing Political Risk
Agencies specializing
in political-risk services
Current employees
with relevant information
Information gathering
Gather data to better
predict and manage risk

47. Foreign Corrupt Practices Act Influencing local lawmakers
Managing Political Risk
Corruption
Foreign Corrupt Practices Act
Lobbying
Influencing local lawmakers
Influence local politics
Present firm’s views
on political matters

48. 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

49. 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)
Because common law tends to be relatively ill specified, contracts drafted under a common law framework tend to be very detailed with all contingencies spelled out. In civil law systems, however, contracts tend to be much shorter and less specific because many of the issues typically covered in a common law contract are already covered in a civil code. Thus, it is more expensive to draw up contracts in a common law jurisdiction, and resolving contract disputes can be a very adversarial process in common law systems. But, common law systems have the advantage of greater flexibility and allow for judges to interpret a contract dispute in light of the prevailing situation. International businesses need to be sensitive to these differences; approaching a contract dispute in a state with a civil law system as if it had a common law system may backfire (and vice versa).

50. Corruption as of 2004
Corruption has been well documented in every society, from the banks of the Congo River to the palace of the Dutch royal family, from Japanese politicians to Brazilian bankers, and from Indonesian government officials to the New York City Police Department. According to Transparency International, an independent nonprofit organization dedicated to exposing and fighting corruption, world wide businesses and individuals spend some $400 billion a year on bribes related to government procurement contracts alone.

51. Topic Example Video
The following video outlines the top 10 corrupt countries in the world.
Take note of the key points.

52. 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

53. 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

54. Topic Example Video
The following video focuses on the need for transparency to combat corruption in international business.
Take note of the key points.

55. Government Activities Influence Business
Laws that protect workers and consumers
Trade barriers
Tariffs
Quotas
Boycotts
Licensing requirements

56. International Taxes Customs duty Sales tax Excise tax
Payroll-related tax
Value-added tax (VAT)
Income taxes

57. 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

58. Political Relations with Host and Home Countries
Global companies operating in host countries
Global companies’ relationships with home countries

59. Ethical Behavior
Personal behavior in accordance with rules or standards for right conduct or morality
Enron
Tyco
Worldcom
Parmalat (Italy)
Ethical absolutism
Import ethics
from home
Ethical relativism
When in Rome,
do as the Romans

60. Topic Example Video
The following video is a brief interview with Michael Czinkota about ethics in international business.
Take note of the key points.

61. Social Responsibility
Go beyond legal obligations to balance commitments to investors, customers, communities and other companies
Respect consumers’ rights
Guard workers’ rights
Protect the environment
Preserve employment
Encourage development
Improve health
Support education

62. Favorable international
International Relations
Favorable international
political relations foster:
Stable business environments
Improved business communications
Efficient distribution systems
Prompt and equitable dispute resolution
Expanded opportunities
Diminished risk levels

63. Encouraging International Business
Free-trade zones
Most favored nation (MFN)
Free-trade agreements
Common markets

64. Tax Incentives
Corporate tax deduction on income earned by foreign subsidiaries
Double-taxation avoidance treaties
Tax holiday

65. 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

66. 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

67. 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
Ownership rights over intellectual property are established through patents, copyrights, and trademarks. A patent grants the inventor of a new product or process exclusive rights for a defined period to the manufacture, use, or sale of that invention. Copyrights are the exclusive legal rights of authors, composers, playwrights, artists, and publishers to publish and disperse their work as they see fit. Trademarks are designs and names, often officially registered, by which merchants or manufacturers designate and differentiate their products

68. Topic Example Video
The following video outlines the issues of intellectual property rights in an international context.
Take note of the key points.

69. Piracy of Intellectual Property

70. 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.

71. 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

72. 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

73. Protecting Intellectual Property
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

74. 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

75. 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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