International Business

Chapter Three

The Political and Legal

Environments Facing
Business

Chapter Objectives
To discuss the different goals and functions of

political systems
To profile trends in the emergence and diffusion of
political systems
To identify the idea of political risk and
approaches to managing it
To understand how different political and legal
systems affect the conduct of business
To profile trends in the evolution and diffusion of
legal systems
To examine the major legal issues facing
international business companies
To profile the idea of intellectual property and the
bases of concern and controversy
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Political System Defined

Political system: the complete set of
institutions, political organizations, and
interest groups, the relationships
amongst those institutions, and the
political norms and rules that govern
their functions
The ultimate test of any political system
its ability to hold a society together.

is

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Fig. 3.1: Political and Legal

Influences on
International Business

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Ways to Assess Political

Systems
Individualistic

-people accept the primacy of individual freedoms

in the political, economic, and cultural realms
-people believe in minimal government intervention

Collectivist
-people reason that the needs of society take
precedence over the needs of the individual
-people believe that it is the governments role
to define the needs and priorities of the country
Collectivist paradigms may be either democratic (Japanese)
or authoritarian (Chinese) in nature.
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Political Ideology Defined

Political ideology: the body of
constructs, theories, and aims that
constitute a sociopolitical program
Pluralism indicates the coexistence of a variety of
ideologies within a particular society.
Shared ideologies create bonds within and between
countries; differing ideologies split societies apart.
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Types of Political Ideologies:

The Two Extremes
Democracy:

widespread citizen participation in

the decision-making and governance processes,
either directly or through elected representatives

Totalitarianism: the monopolization of power

by a single agent; opposition is neither
recognized nor tolerated

In theocratic totalitarianism, religious leaders are

also the political leaders; in secular totalitarianism,
the government imposes order via military power.
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Fig. 3.2: The Political

Spectrum

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Features of Contemporary
Democratic Systems
freedom of opinion, expression,
and the press
freedom to organize
free elections
limited terms for elected officials
an independent and fair court system
a nonpolitical bureaucracy
defense infrastructure
citizen access to the decision-making
process

and

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Fig. 3.3: Comparative Measures

of Freedom

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Map 3.2: Global Trends in

Freedom: Political Freedom
2004

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Trends in Political Systems

Totalitarian regimes continue to fail as citizens
challenge the right of the state to govern.
Many who champion democracy truly believe
that greater political freedom also leads to
economic freedom and higher standards of
living.
Differentialism, i.e., the clash of civilizations,
refers to the arguments that apparently innate
and irreconcilable difference amongst cultures
can trigger a backlash against Western ideas
regarding political rights and civil liberties.

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Political Risk Defined

Political risk: the expectation, i.e., the
likelihood, that the political climate in
a country will change in such a way
that a firms operating position or
investment value will deteriorate
MNEs do their best to effectively deal with
the threat of political risk through active
and/or passive approaches.
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Types of Political Risk

[ranging from the least
destructive]

to the most

Systemic [a change in public policy]

labor
Procedural [bureaucratic delays,
disputes, etc.]
Distributive [tax and regulatory revisions]
Catastrophic [random political events]

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Leading Sources of Political

Risk
Expropriation or nationalization
International war or civil strife
Unilateral breaches of contract
Destructive governmental actions
Harmful actions against people
Restrictions on the repatriation of profits
Differing points of view
Discriminatory taxation policies
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Legal System Defined

Legal system: the mechanism for
creating, interpreting, and enforcing
the laws in a specified jurisdiction
Generally, differences in the structure
of law influence the attractiveness of
a particular country as an investment site.
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Types of Legal Systems

Common law [based on precedent]
Civil law [based upon a set of laws that
comprise a code]
Theocratic law [based upon religious
precepts]

Customary law anchors itself in the wisdom of

daily experience or important traditions. A
mixed legal system emerges when two or
more legal systems are used within a single
country.
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Map 3.3: Legal Systems

in the World Today

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Fig. 3.4: The Diffusion of Civil

Law:
A Selective Profile

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Legal Issues in International

Business
Operational concerns
ease of entry and exit
hiring and firing employees
contract enforcement

Strategic concerns

product safety and liability

marketplace behavior
product origin
legal jurisdiction
arbitration
[continued]

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 Intellectual property rights [IPRs]:

ownership rights to intangible assets

[copyrights, patents, trademarks, etc.]
Generally, less developed countries provide less
protection for IPRs than do industrialized nations.
Those countries with a more individualistic
orientation view IPRs as intrinsically legitimate,
but those with a more collectivist outlook
extol
the virtues of shared ownership.

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Implications/Conclusions

Many countries are in a state of political

transition. Presently, there is a shift
away from totalitarian governments
toward more democratic political ideals
and freer market principles.
[continued]

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 International business is affected by laws

and regulations enacted both by countries

and by international organizations.
Laws may be at cross-purposes; some
may diminish the ability of firms to
compete with foreign competitors.

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