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

3-1 Appraise the principles and practices of the political

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

Figure 3.1 Political and Legal Factors Influencing IB

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,
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
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
 Democrats vs. Republicans in the United

 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
 the freedom expression
Spectrum Analysis
The Political Spectrum
 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
 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
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

world/freedom-world-2015. Used by permission of Freedom House.
Third Wave of Democratization
 Third Wave of Democratization
 number of democracies doubled in two
 Engines of Democracy
1. The failure of totalitarian regimes to deliver economic
2. Improved communications technology
3. Economic dividends of increasing political freedom
Recession and Retreat
 Democracy’s retreat
 just 26 of the world’s democracies are full
 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 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
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
 no “global” patent, trademark or copyright
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


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

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