International

Business
Environments & Operations
15e, Global Edition

Daniels ● Radebaugh ● Sullivan

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 Chapter 3
Governmental and
Legal Systems

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 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
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 Learning Objectives
 Profile trends in contemporary legal
systems
 Identify and describe key legal issues
facing international companies

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 Introduction
Learning Objective:
Discuss the philosophy and practices of
the political environment

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 Introduction
 Every country has its own political and
legal environment
 Companies must determine where, when,
and how to adjust their business practices
without undermining the basis for success

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 Introduction
Political and Legal Factors Influencing International Business
Operations

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 The Political Environment
 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

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 Individualism vs. Collectivism
 Individualism
 primacy of the rights and role of the
individual: Laissez-faire (US,Canada,
Australia, New Zealand, Netherldan)
 Collectivism
 primacy of the rights and role of the
community: Improve the welfare of all
members of society (China, Vietnam, Japan,
South Korea, Taiwan, Mexico)

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 Political Ideology
 A political ideology stipulates how
society ought to function and outlines the
methods by which it will do so
 Most modern societies are pluralistic
 different groups champion competing political
ideologies: there are two or more groups im a country
differ in terms of language (Belgium), class
structure(UK), etnic background (South Africa),
religion(India)
 Democrats vs. Republicans in the United
States
 Democratic Party vs. Liberal Party in Japan 3-10
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 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

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Spectrum Analysis
The Political Spectrum

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 Democracy
 In a democracy
 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
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 Totalitarianism
 A totalitarian system subordinates the
individual to the interests of the collective
 dissent is eliminated through indoctrination,
persecution, surveillance, propaganda,
censorship, and violence
 Prominent types of totalitarianism include
 Authoritarianism: North Korea, Kazakhstan
 Fascism: a single party state
 Secular: a single party gov, China, Vietnam
 Theocratic: Gov is an expresion of the preferred deity:
Iran, Afganistan, Saudi Arabia

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 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

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The Standard of Freedom
Map of Political Freedom, 2013

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Trends in Political Ideologies
Learning Objective:
Profile trends in contemporary political
systems

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Third Wave of Democratization
 Third Wave of Democratization (the
third major surge of democracy in the 20th century that
began in 1974)
 number of democracies doubled in two
decades
 Engines of Democracy
1. The failure of totalitarian regimes to deliver
economic progress
2. Improved communications technology
3. Economic dividends of increasing political freedom

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 Democracy:
Recession and Retreat
Freedom in the World: Gains and Declines

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Political Ideology and the MNE
 What will the political map look like in the
future?
 The Washington Consensus (The Washington
Consensus champions democracy, freedom, the rule of
law, and human rights. )
 The Beijing Consensus (The Beijing Consensus calls for
a one-party system in which elected representatives,
preapproved by the ruling party, vote, cannot participate in
decision making.)

 The Clash of Civilizations (Under the Clash of

Civilizations scenario irreconcilable cultural and religious
differences between Islam and the West)
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 Political Risk
Learning Objective:
Explain political risk management

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 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:
In many fast growing emergingmarket: Legal system,
fragile insitution, volatile societies, corrupt regimes.
 Types:
 Systemic (new political leader: reducing individual benefit
of business activity, increasing tax rates)
 Procedural (procedural transaction between subsidiaries,
companies or countries; many functions of government has been
adopted for personal gain)

 Distributive (“fair” share rewards for the host gov.from

MNE that has greater profits)
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 Catastrophic
Classifying Political Risk
Characteristics of Political Risk

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 The Legal Environment
Learning Objective:
Discuss the principles and practices of the
legal system

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 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 tradition, precedent, custom,
interpretation by courts.
 Civil law: Statutary law (Undang-undang)
 Theocratic law: relies on religious doctrine, belief
 Customary law: Wisdom of daily experience
 Mixed systems
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The Legal Environment
The Wide World of Legal Systems

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 Trends in Legal Systems
Learning Objective:
Profile trends in contemporary legal
systems

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 Trends in Legal Systems
 What is the basis of rule in a country?
 The rule of man (China: The party sits outside and
above the law) ( Sadam Hussen: Law is
 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
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Trends in Legal Systems
The Worldwide Practice of the Rule of Law

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 Legal Issues in IB
Learning Objective:
Identify and describe key legal issues
facing international companies

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 Operational Concerns
 Operational issues
 Starting a business: Involves activities such as
registering a name, choosing the appropriate tax
structure, obtaining licences and permit, securing
insurance.
 Making and enforcing contracts: With buyers and
sellers.
 Hiring and firing local workers
 Closing down the business: In US, the Internal
Revenue Service requires reporting the sale of assets, ,
payments to subcontractors, terminations of retirements
plans.
 In general
 rich countries regulate less
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 poor countries regulate more

 Strategic Concerns

 Country Characteristics: To import a

product, the host government devise law that
consider the product’s country of origin (policy to
product label: COOL (country-of-origin labeling)
 Product safety and liability: The law that
require an MNE to adapt a product or market access
 Legal jurisdiction

 Intellectual property
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 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

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 Intellectual Property:
Rights and Protection
 Attitudes towards intellectual property
 Historical legacies
 rule of man versus rule of law : Most
counterfeit goods are made in country which the rule
of man is legal. Countries with the rule of law more
protect IP rights.
 Economic circumstances
 levels of economic development: For
developed countries, protecting IP is the best way to
energize innovation.
 Cultural orientation
 individualism versus collectivism: In
collectivist countries ifPearson
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create Ltd. something it should
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improve the society welfare.

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