copyright © 2015 pearson education, inc.3-1 international business environments & operations...

Copyright © 2015 Pearson Education, Inc. 3-1

International Business

Environments & Operations

15e

Daniels ● Radebaugh ● Sullivan


Chapter 3

The Political and Legal Environments

Facing Business


Learning Objectives Discuss the philosophy and practices of the

political environment Profile trends in contemporary political systems Describe current trends in political ideologies and

their implications to MNE’s choices Explain political risk management Compare the relative benefits and drawbacks of

proactive versus passive political risk management

Discuss the principles and practices of the legal system


The Political Environment

Every country has its own political and legal environment

Companies must determine where, when, and how to adjust their business practices to succeed

Managers evaluate, monitor, and forecast political environments

A country’s political system refers to the structural dimensions and power dynamics of its government that specify institutions, organizations, and interest groups, and define the norms that govern political activities


Individualism vs. Collectivism

Our political system emanates from our philosophical belief or orientation, our thought process, how we want to govern ourselves Individualism: primacy of the rights and role

of the individual Collectivism: primacy of the rights and role of

the community


Political Ideology Why should we study the political system or the

political ideology of the ruling parties of a country? What are the implications for business?

A political ideology stipulates how society ought to function and outlines the methods by which it will do so. It affects government spending, trade, and investment.

Most modern societies are pluralistic different groups champion competing political

ideologies, examples: Democrats vs. Republicans in the United States


Spectrum Analysis A political spectrum outlines the various

forms of political ideology Political freedom measures

the degree to which fair and competitive elections occur

the extent to which individual and group freedoms are guaranteed

the legitimacy ascribed to the general rule of law

the freedom expression


Spectrum AnalysisThe Political Spectrum


Democracy In a democracy(a government “of the

people, by the people and for the people”) all citizens are politically and legally equal all are equally entitled to freedom of thought,

opinion, belief, speech, and association all equally command sovereign power over

public officials Prominent types of democracy include

Representative Multiparty Parliamentary Social

10

Modern History of Democracy

Before World War I After World War II

A decline in colonial empires Rise of democratic nation states Cold War

Fall of Berlin Wall, 1989-democratic governments/institutions are on the rise

1990-2012 Democracy in Latin America, Asia, Africa Arab Spring

Is democracy universal-Western vs. Eastern Models

Thesis

Antithesis

Synthesis (Thesis)

Antithesis

Synthesis (Thesis)

Evolution, Democracy and the (Hegelian) Dialectic

Figure 1: Freedom Over the Years

Figure 2: Freedom Status

Figure 3Global Competitiveness Index and Political

Rights

Plot of gci*pr$country. Symbol used is '*'. G | l | USA o 56 + * SG SWE* b 55 + DK *GE a 54 + FI *NL l 53 + CA *JP 52 + AU * U C 51 + * BY ATW*NO o 50 + * QA NZ *FR m 49 + * UAE * MY SKA p 48 + * SA IL *CZ e 47 + * CN CL *SI t 46 + * TH EE * i 45 + * TN OM * BH * KW SP PT t 44 + SAF LT*IT i 43 + JO * AZ IN * ID CR *PA v 42 + * RU * TR MX * BR HU *PL e 41 + * KZ CO * BW RNA* LV UY * n 40 + * VN EG * ALG * MA SLK * GT UA * MK EL * BG CRO * e 39 + * LY PH * HN PE* AR GR s 38 + * SY * GE * SN JM * DO s 37 + * AM * NG * KE * AL SER 36 + TZ * PK EC * BD * BJ I 35 + CM * CAM VE * UG * BA ZM * PY GH * n 34 + KG * CI * ET * NI MW * BO * MON d 33 + MG TJ e 32 + * BF * MZ * ML x 31 + - 30 + s 29 + * CHA c 28 + * ZW a | l ---+-------------+-------------+-------------+-------------+-------------+-------------+-- e 14.29 28.57 42.86 57.14 71.43 85.71 100.00 Political Rights-scale of 100 NOTE: 22 obs had missing values. 43 obs hidden. 3 label characters hidden.


Totalitarianism A totalitarian system subordinates the individual to

the interests of the collective monopolization of power by a single agent--

opposition is neither recognized nor tolerated. dissent is eliminated through indoctrination,

persecution, surveillance, propaganda, censorship, and violence

Prominent types of totalitarianism include Authoritarianism Fascism Secular Theocratic


The Standard of Freedom Freedom House, and independent

watchdog organization, assesses political and civil freedom around the world

Freedom House recognizes three types of political systems Free Partly free Not free


The Standard of FreedomMap of Political Freedom, 2013


Third Wave of Democratization

Third Wave of Democratization number of democracies doubled in two

decades Engines of Democracy

1. The failure of totalitarian regimes to deliver economic progress

2. Improved communications technology3. Economic dividends of increasing political

freedom


Democracy: Recession and Retreat

Democracy’s retreat just 26 of the world’s democracies are full

democracies Engines of Authoritarianism

Political economy of growth Rhetoric vs. Reality - Inconsistencies Economic problems Who defines Democracy?


Democracy: Recession and Retreat

Freedom in the World: Gains and Declines


Political Ideology and the MNE

MNE adapts to the political ideology of the country

What will the political map look like in the future? The Washington Consensus The Beijing Consensus The Clash of Civilizations


Political Risk Political risk refers to the risk that

political decisions or events in a country negatively affect the profitability or sustainability of an investment

Types of Political Risk: Systemic, Procedural, Distributive, Catastrophic

Political Risk may involve Nationalization by the State (Confiscation, Expropriation, and Domestication)


Classifying Political Risk Characteristics of Political Risk

24

Managing Political Risks

Be a good corporate citizen (example: participate in development projects, literacy etc.)

Expand power bases through business relationships (example: joint venture, licensing, political payoffs etc.)

Study government attitude and participate government incentive programs

Maintain good relationship with political allies, other embassies in the country


The Legal Environment The legal system is the mechanism for

creating, interpreting, and enforcing the laws in a specified jurisdiction.

Types: Common law [based on precedent, traditions] Civil law [based upon a set of laws that

comprise a code] Theocratic law [based upon religious precepts] Customary law [local customs and practices,

example- indigenous societies] Mixed systems


The Legal EnvironmentThe Wide World of Legal Systems


Trends in Legal Systems What is the basis of rule in a country?

The rule of man legal rights derive from the individual who

commands the power to impose them associated with a totalitarian system

The rule of law systematic and objective laws applied by

public officials who are held accountable for their administration

associated with a democratic system


Trends in Legal SystemsThe Worldwide Practice of the Rule of Law


Implication for Managers Operational concerns/issues

Starting a business Making and enforcing contracts Hiring and firing local workers Closing down the business

Strategic concerns/issues Country Characteristics Product safety and liability Legal jurisdiction Intellectual property


Intellectual Property: Rights and Protection

Intellectual property refers to creative ideas, expertise, or intangible insights that grant its owner a competitive advantage

Intellectual property rights refer to the right to control and derive the benefits from writing, inventions, processes, and identifiers no “global” patent, trademark or copyright

exists


Intellectual Property: Rights and Protection

Attitudes towards intellectual property Historical legacies

rule of man versus rule of law Economic circumstances

levels of economic development Cultural orientation

individualism versus collectivism

32

Chapter 3: Discussion Questions1. Define political system and explain why a

business manager should study the political system of a country.

2. How does democracy differ from totalitarianism? Will the conduct of business be different in the two systems? How?

3. Describe how the political ideologies are changing in the world. How a manager can adapt to such changes?

4. What is political risk? How can we manage political risk?

5. Define the Types Legal Systems and their implications in international business.


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