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International

Business
Environments & Operations
Daniels ● Radebaugh ● Sullivan
Chapter 3
Political and Legal
Environments Facing
Business
Learning Objectives

3-1 Appraise the principles and practices of the political


environment
3-2 Discuss the contemporary state of political freedom
3-3 Interpret political risk
3-4 Appraise the principles and practices of the legal
environment
3-5 Describe key legal issues facing international
companies
Political and Legal Forces

Figure 3.1 Political and Legal Factors Influencing IB


Operations
Political Risk Map
Objective 3-1 Map 3.1 Map of Political Risk, 2015

Source: Based on Marsh Political Risk Map 2015; and AON Political Risk,
http://www.aon.com/2016politicalriskmap
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
Individualism vs. Collectivism
 Individualism
 primacy of the rights and role of the
individual (laissez-faire)
 Collectivism
 primacy of the rights and role of the
community (governmental intervention)
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
 Democrats vs. Republicans in the United

States
 Democratic Party vs. Liberal Party in Japan
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 Analysis
The Political Spectrum
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
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
 Fascism
 Secular
 Theocratic
The Legal Environment
Learning Objective3-2:
Discuss the contemporary state of political
freedom
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 State
Objective 3-2
of Political Freedom
Map 3.2 Map of Freedom

Source: Freedom House, “Map of Freedom 2015,” at https://freedomhouse.org/report/freedom-


world/freedom-world-2015. Used by permission of Freedom House.
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 technology
3. 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?

the Democratic
People's Republic Republic of Korea 
of Korea 
Political Risk
Learning Objective3-3:
Interpret political risk
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:
 Systemic
 Procedural
 Distributive
 Catastrophic
Types of Political Risk
Objective 3-3 Figure 3.4 Classes and Characteristics of Political Risk
The Legal Environment
Learning Objective3-4:
Appraise the principles and practices of the
legal environment
The Legal Environment
 The legal system is the mechanism for
creating, interpreting, and enforcing the
laws in a specified jurisdiction
 Types:
 Common law
 Civil law
 Theocratic law
 Customary law
 Mixed systems
Types of Legal Systems
Objective 3-4
Map 3.4 The Wide World of Legal Systems

Source: University of Ottawa, “World Legal Systems,” retrieved February 15, 2016, from
http://www.juriglobe.ca/eng/index.php. Used by permission.
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 Systems
The Worldwide Practice of the Rule of Law
Legal Issues in IB
Learning Objective3-5:
Describe key legal issues facing international
companies
Operational Concerns
 Operational issues
 Starting a business
 Making and enforcing contracts
 Hiring and firing local workers
 Closing down the business
 In general
 rich countries regulate less
 poor countries regulate more
Strategic Concerns
 Country Characteristics
 Country-of-origin, buy-local campaigns
 Sourcing, distributing, advertising, and pricing

 Product safety and liability


 (e.g., compensation due to injury from defects)

 Legal jurisdiction
 (e.g., criteria for litigation)

 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
Ranking of Doing Business in Various Countries

Table 3.5 Easy Here, Hard There: Doing Business In Various


Countries

Source: Doing Business 2016. The World Bank. Retrieved May 15, 2016.

Source: Doing Business 2016. The World Bank. Retrieved May 15, 2016.