f08 ch 06 political and legal syste
TRANSCRIPT
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International Business: Strategy, Management, and the New Realities 1
International Business
Strategy, Management & the New Realities
by
Cavusgil, Knight and Riesenberger
Chapter 6
Political and Legal Systems in
National Environments
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International Business: Strategy, Management, and the New Realities 2
Country Risk
Exposure to potential loss or adverse effects on
company operations and profitability caused by
developments in a countrys political and/or legal
environments. Also referred to as political risk.
Each country has a unique political and legal
system that may pose challenges for company
strategy and performance
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International Business: Strategy, Management, and the New Realities 4
What Gives Rise to Country Risk?
Immediate cause is a political or legal factor, buteconomic, social, or technological developmentsmay be the root cause.
Laws may be unexpectedly strict, political/
legislative actions may harm business (eventhough not the intent).
Example - In China, the government censorsmaterial that criticizes the government. Yahoomust monitor the information that appears on its
Web site to prevent the Chinese governmentfrom shutting down its China operations.
Weak law enforcement is also often a factor.
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International Business: Strategy, Management, and the New Realities 6
What are Political and Legal Systems?
Political system - a set of formal institutions
that constitute a government and how these
groups interact with each other. Includes
legislative bodies, political parties, lobbyinggroups, and trade unions.
Legal system - a system for interpreting and
enforcing laws and regulations. Includesinstitutions and procedures for ensuring order
and resolving disputes.
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International Business: Strategy, Management, and the New Realities 7
Three MajorTypes of Political Systems
Totalitarianism
Socialism
Democracy
These categories are not mutually exclusive. E.g.,
most democracies include some elements of
socialism.
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International Business: Strategy, Management, and the New Realities 9
Totalitarianism
Government controls all economic and political matters. Eithertheocratic (religion-based) orsecular
A state party is led by a dictator. Membership is mandatory
for those wanting to advance.
Power sustained via secret police, propaganda, regulation offree discussion and criticism.
Examples: China (19491980s), Germany (19331945),
Soviet Union (19181991), and Spain (19391975).
Today, some states in the Middle East and Africa employtotalitarianism.
Many ex-totalitarian states have much government
intervention, red tape, and bureaucracy
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International Business: Strategy, Management, and the New Realities 10
Socialism
Capital and wealth vested in the state and used
primarily as a means of production for use rather
than for profit.
Group welfare outweighs individual welfare.
Governments role is to control the basic means of
production, distribution, and commercial activity.
Socialism occurs in much of the world as social
democracy(e.g., Western Europe, Brazil,India).
Frequent government intervention in the private
sector.
Corporate income tax rates are higher.
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International Business: Strategy, Management, and the New Realities 11
Two Key Features of Democracy
Private property rights: The ability to own property
and assets and to increase ones asset base by
accumulating private wealth. Propertyincludes
land, buildings, stocks, contracts, patents.
Encourages initiative, ambition, innovation.
Limited government: The government performs
only essential functions that serve all citizens, such
as national defense, maintaining law & order,foreign relations, and providing basic infrastructure
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International Business: Strategy, Management, and the New Realities 12
Democracys Link to Economic Freedom
Empirical evidence suggests that
democracy -- greater economic freedom
leads to higher economic living standards.
Economic freedom flourishes in systems
characterized by:
Free market economics Strong rule of law
Minimal government intervention in business
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International Business: Strategy, Management, and the New Realities 14
Command (Centrally Planned) Economies
The state is responsible for making all decisions: whatgoods and services the country produces; quantity of
production; prices at which they are sold; and distribution.
The state owns all wealth, land, and capital, and allocates
resources based on which industries they want to develop. Common in the 20th century, command economies proved
so inefficient that most have gradually died out.
Central planning is less efficient than market forces in
synchronizing supply and demand.
Today many countries exhibit some characteristics of
command economies; e.g., China, India, Russia, and
certain countries in Central Asia, Eastern Europe, and
Middle East.
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International Business: Strategy, Management, and the New Realities 15
Market Economies and Mixed Economies
In market economies,
Decisions are largely left to market forces, theinteraction of supply and demand.
Individuals and firms are main decision
-makers.
Government intervention is limited.
Associated mainly with Capitalism
Mixed economies have features of both market andcommand economies, combining state intervention
andmarket mechanisms (e.g., Sweden, Singapore)
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International Business: Strategy, Management, and the New Realities 16
Five Types of Legal Systems
The five legal systems are the foundation for
laws and regulations:
Common law
Civil law
Religious law
Socialist law
Mixed systems
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International Business: Strategy, Management, and the New Realities 18
Common (Case) Law
A legal system that originated in England andspread to Australia, Canada, USA, and other
former members of the British Commonwealth
(also known as case law).
The basis of law is tradition, past practices, and
legal precedents set by courts via interpretation
of statutes, legislation, and past rulings.
Judges have much power to interpretlawsbased on the circumstances of individual cases.
Thus, common law is relatively flexible.
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International Business: Strategy, Management, and the New Realities 19
Civil (Code) Law
Found in France, Germany, Italy, Japan, Turkey,
and much ofLatin America.
Based on an all-inclusive system of laws that have
been codified, clearly written by legislative bodies Laws are more cast in stone and not strongly
subject to interpretation by courts
* * * * * * * *
A key difference between civil law and common law is thatcommon law is mainly judicialin origin and based on court
decisions, whereas civil law is mainly legislative in origin and
based on laws passed by legislatures
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International Business: Strategy, Management, and the New Realities 21
Religious Law
Strongly influenced by religious beliefs,
ethical codes, and moral values, viewed as
mandated by a supreme being.
Most important religious legal systems arebased on Hindu, Jewish, and Islamic law.
Islamic law spells out norms of behavior
regarding politics, economics, banking,
contracts, marriage, and many other social
and business issues.
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International Business: Strategy, Management, and the New Realities 22
Socialist Law
Found mainly in China, former Soviet
Union, and a few states in Africa
Based on Civil Law, with elements of
socialist principles that emphasize stateownership of property -- state rights take
precedence over individuals
Tends toward loose treatment of propertyand intellectual property rights
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International Business: Strategy, Management, and the New Realities 23
Actors in Political and Legal Systems
The government, or the public sector, is the most
important actor, operating at federal and local levels.
Supranational agencies such as the World Trade
Organization, United Nations, and the World Bank
Regional trade organizations, such as the
European Union (EU), the North American Free
Trade Agreement (NAFTA), etc.
Special interest groups such as labor unions andenvironmental groups
Local competing firms oppose foreign firms, and
lobby their governments accordingly.
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International Business: Strategy, Management, and the New Realities 25
Country Risk Produced by the Political System:
Government Takeover of Corporate Assets
Confiscation: seizure of foreign assets withoutcompensation. E.g., Venezuelan President Hugo
Chavez confiscated a major oil field owned by
French firm Total.
Expropriation: seizure of corporate assets withcompensation.
Nationalization: government takeover of an entire
industry, with or without compensation. In 2006, the
government of Bolivia nationalized much of thecountrys oil and gas industry.
Privatization: selling state-owned enterprises to
private interests.
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International Business: Strategy, Management, and the New Realities 26
Country Risk Produced by the Legal System
Foreign investment laws affect the type of entry
strategy firms choose, as well as their operations
and performance. Nations impose restrictions on
inward FDI, such as Japans large retail store law or
the U.S. and Dubai Ports World
Controls on operating forms and practices affect
firms production, marketing, and distribution
activities. E.g., China requires market entry via joint
venture in its huge telecommunications sector.
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International Business: Strategy, Management, and the New Realities 27
Country Risk Produced by the Legal System
Marketing and distribution laws determine whichpractices are allowed in advertising, promotion, and
distribution. E.g., laws may restrict TV advertising
aimed at children.
Laws regarding income repatriation limit the
amount of net income or dividends that firms can
bring back to the home country.
Environmental laws are intended to preservenatural resources, combat pollution, and ensure
health and safety. E.g., in Germany, firms must
follow strict recycling regulations.
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International Business: Strategy, Management, and the New Realities 28
Country Risk Arising from the
Home-CountryLegal Environment
Extraterritoriality: application of home-
country laws to other countries. E.g., the
European Union has pursued Microsoft for
perceived monopolistic practices.
Foreign Corrupt Practices Act (1977) made
it illegal to offer bribes to foreign parties. But,
definition of a bribe is unclear; Harms U.S.interests because foreign competitors are not
so constrained.
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Transparency in Financial Reporting
Transparency -- degree to which firms regularly
reveal substantial financial & accounting
information
Timing and transparency of financial reporting
vary widely around the world.
Sarbanes-Oxley Act (2002) promotes greater
transparency in accounting practices. But, costof compliance is high; Discourages foreign firms
from listing or transacting extensively in the U.S.
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International Business: Strategy, Management, and the New Realities 31
Ethical Values and Practices
Ethics refers to the moral behavior of people,
firms, or governments- issues often arise, or
may be exacerbated, by deficiencies in legal
systems.
Corruption typically involves the use of bribery
and fraud to achieve business goals. Most
common in developing economies.
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International Business: Strategy, Management, and the New Realities 32
Contract Law
Local contract law is a factor in five types of
contracts:
1.Sale of goods or services;2.Distribution via foreign intermediaries;
3.Licensing and franchising;
4.F
oreign direct investment; and5.Joint ventures.
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International Business: Strategy, Management, and the New Realities 33
Protection through Legal Contracts
A legal contract spells out the rights and obligations ofeach party; especially important when relationships goawry.
Three approaches for resolving contractual disputes:
1. Conciliation is the least adversarial method; a formal
process of negotiation that aims to resolvedifferences in a friendly manner. Common in China.
2. Arbitration is a process in which a neutral third partyhears both sides of a case and decides in favor ofone party or the other, based on an objective
assessment of the facts.3. Litigation is the most adversarial approach, andoccurs when one party files a lawsuit against another;Most common in the United States.
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