2. Political System
Political system includes the structures,
processes, and activities by which a nation
governs itself.
Political systems can be assessed
according to two dimensions
• Degree to which they emphasize collectivism as
opposed to individualism
• Degree to which they are democratic or totalitarian
3. Political Participation
Who participates in them
And
What extend they participate
Wide participation occurs when people capable of
influencing the political system make an effort to do so
Narrow participation occurs when few people
participate
4. Political Ideologies
Totalitarianism Pluralism Anarchism
Both private and public
groups need to balance
each other’s power
Every aspect of Only individuals and
people’s lives must be private groups can
controlled to preserve order preserve personal liberties
- No individual liberties
5. Political Ideologies
Most modern societies are pluralistic
politically
• Arise due to differences in
languages, ethnic background,
tribal groups or religions
6. The Political Spectrum
Aut
h orit
aria
n
e
ativ
erv
ns
Co
Fascist
Democratic Nondemocratic
Democracy Totalitarianism
Government Government
Lib
era
ist
l
un
mm
Co
7. Indicators of Political Rights
Degree to which fair and competitive
elections occur
Ability of voters to endow
representatives with real power
Ability to organize political parties
Existence of safeguards on the rights
of minorities
3-4
8. Indicators of Civil Liberties
Existence of freedom of the press
Equality under the law for all
individuals
Extent of personal social freedoms
Degree of freedom from extreme
governmental indifference or
corruption
3-6
9. Comparative Measures of Freedom
POLITICAL RIGHTS
Not Free Partly Free Free
CIVIL LIBERTIES
3-7
10.
11. Democracy
Freedom of opinion, expression, press and
organization
Elections
Limited terms for elected officials
Independent court system
• High regard for individual rights
• Respect for property
Nonpolitical bureaucracy and defense
infrastructure
Accessibility to the decision-making
process
3-8
12. Totalitarianism
Typically theocratic or secular
Opposite end of the political spectrum
from democracy
Order is often imposed through military
power
Single party, group, or individual
monopolizes political power
Lack of constitutional guarantees
Neither recognizes nor permits opposition
Fascism
Authoritarianism (tribal, right-wing)
Communism/ socialism 3-9
13. States in Transition
The political of the world has
changed radically since the late
1980’s
A wave of democratic revolutions swept
the world
15. Political Risks for International Business
Political Risk—caused by political instability
• Promotes fear that operating position will deteriorate
• Tends to be higher in totalitarian regimes
Sources of political risks
• Unstable Political System
• Political involvement of religious or military
leader
• Frequent changes in government
• Corrupt or poor leadership
• Civil disorder due to:
Economic conditions
Human rights violations
Conflict among races, religions & etnics
Group animosity
3-11
16. Can cause:
• Procurement difficulties
• Work stoppages
• Shipment delays
• Property damage
Types of political risk
• Micro—political actions are aimed at specific
foreign investments
• Eg; Pakistan, France
• Macro—political actions affect a broad
spectrum of foreign investors
• Eg; Cuba
17. Types of Political Risk
Conflict &
Violence
Local Content Terrorism &
requirements Kidnapping
Political
Risks
Policy Property
Changes Seizure
18. Conflict and Violence
Arises from: Reduces ability to:
People’s resentment Obtain materials
toward government and equipment
Territorial disputes Manufacture and
between nations distribute products
Ethnic, racial or Protect employees’ lives
religious disputes and firm’s assets
19. Terrorism and Kidnapping
Kidnapping and other terrorist
activities are means of making
political statements.
Kidnapping and the taking of
hostages may be used to fund a
terrorist group’s activities.
Executives of large international
companies are prime targets.
20. Terrorism and Kidnapping
Security checklist for managers on business abroad:
Fly non-stop when possible and avoid unsecured areas of
airports
During your stay, vary your routines and means of
transportation
Keep a low profile and refrain from loud, flashy behavior
Give friendly but cautious answers to personal questions
Know local emergency procedures before trouble strikes
21. Confiscation
The forced transfer of assets
Property Seizure
from a company
to the government without
compensation
Expropriation Nationalization
The forced transfer of assets When expropriation involv
from a company to the one or a small number o
government with companies in an industry
compensation the government may tak
over an entire industry
22. Policies and Laws
Policy changes restrict:
• Foreign ownership
• Investment levels
• Business activities
23. Local Content Requirements
Laws stipulating that a specified
amount of a good or service be
supplied by producers in the
domestic market. These
requirements can force companies to
use locally available raw materials,
procure parts from local suppliers, or
employ a minimum number of local
workers.
24. Managing Political Risk
Avoidance
Influencing
Local Risks Adaptation
Politics
Information
Gathering
25. Managing Political Risk
Local equity / debt
Localization
Adaptation
Adaptation
Incorporate risk into
Incorporate risk into Development assistance
business strategies
business strategies
Partnerships
Insurance
26. Managing Political Risk
Current employees
with relevant information
Information gathering
Information gathering
Gather data to better
Gather data to better
predict and manage risk
predict and manage risk
Agencies specializing
in political-risk services
27. Managing Political Risk
Lobbying
Influencing local lawmakers
Influence local politics
Influence local politics
Present firm’s views
Present firm’s views
on political matters
on political matters
Corruption
Foreign Corrupt Practices Act
28. Legal Systems
Rules - laws - that regulate
behavior
• Processes through which laws are enforced &
grievances are redressed
Three main types of legal
systems – in use around the
world:
• Common law
• Civil law
• Theocratic law
29. Kinds of Legal Systems
Common law—based on tradition, precedent, custom, and usage
• Interpretation by the courts
• US and UK
Civil law—codified legal system
• Based on a detailed set of laws that make up a code
• Rules for business transaction included
• Based on how the law is applied to the facts
• Germany France, Japan
Theocratic law—based on religious precepts
• e.g., Islamic law
– has remained frozen
– moral rather than commercial law
– intended to govern all aspects of life
– Sudan and Pakistan
30. Contract Law
Contract law is the body of law that enforces a
contract
• Specifies conditions under which an exchange is to
occur
• Details rights and obligations of parties
Dispute resolution is often complex
• Where to arbitrate and whose laws apply?
• Validity of contracts and decisions
Role of United Nations Convention on Contracts
for the International Sale of Goods (CIGS)
31. Foreign Corrupt Practices Act
The act was passed during the 1970s following
revelations that U.S. companies had bribed
government officials in foreign countries in an
attempt to win lucrative contracts
This law makes it illegal to bribe a foreign
government official in order to obtain or maintain
business
The act allows facilitating or expediting payments
to secure the performance of a routine
governmental action
32. Corruption as of 2004
Figure 2.1: Rankings of Corruption by Country
2004
Finland
New Zeland
United Kingdom
United States
France
Malaysia
Italy
Brazil
China
India
Russia
Zimbabw e
Indonesia
Nigeria
Bangladesh
0 2 4 6 8 10
Corruption Index (10=clean; 0=totally corrupt)
33. Intellectual Property Rights
Intellectual property refers to property
that is the product of intellectual activity
Intellectual property laws are a very
important stimulus to innovation and
creative work
Protection of intellectual property rights
differs greatly from country to country
34. Piracy of Intellectual Property
Figure 2.2: Regional Piracy Rates for Software
Eastern Europe
Asia Pacific
Latin America
Middle East and Africa
Western Europe
North America
0 20 40 60 80
Percentage of Software that is Pirated
35. Product Safety and Liability
Product safety laws set safety standards
for products and manufacturing processes
Product liability laws hold the firm and its
officers responsible for product safety
standards
Criminal laws/ civil liability laws
• Civil laws call for payment and monetary damages
• Criminal liability laws result in fines or imprisonment
36. Other Legal Issues for International
Businesses
Worker relations
• Health and safety standards
• Workweek
Employment practices
Antitrust prohibitions
Environmental practices
Patents, trademarks, and intellectual
property protection
Taxes and reporting requirements
3-15
37. Political Strategies for International
Businesses
Identify the exact issue
• Trade barrier?
• Environmental standards?
• Workers rights, etc?
Define/determine the political aspect of the issue
Assess the potential political action of other
companies
Identify important institutions and individuals
Formulate strategies
• Key objectives
• Alternatives
• Probable effectiveness
3-13
38. Attractiveness
Figure 2.1: Country Attractiveness
Costs
Benefits Corruption
Size of Economy Lack of Infrastructure
Likely Economic Growth Legal Costs
Overall
Attractiveness
Risks
Political Risks: Social Unrest/Anti-Business Trends
Economic Risks: Economic Mismanagement
Legal Risks: Failure to Safeguard Property Rights
39. Ethical Behavior
Personal behavior in accordance with rules or
standards for right conduct or morality
Enron Ethical absolutism
Import ethics
Tyco from home
Worldcom
Parmalat (Italy) Ethical relativism
When in Rome,
do as the Romans
40. Social Responsibility
Go beyond legal obligations to balance commitments to
investors, customers, communities and other companies
Respect consumers’ rights
Guard workers’ rights
Protect the environment
Preserve employment
Encourage development
Improve health
Support education
41. International Relations
Favorable international
political relations foster:
Stable business
environments
Improved business
communications
Efficient distribution
systems
Prompt and equitable
dispute resolution
Expanded
opportunities
Diminished risk levels
Notas del editor
Map 2.5 – Political Freedom, 2004, p. 69
The legal system of a country is of immense importance to international business. A country’s laws regulate business practice, define the manner in which business transactions are to be executed, and set down the rights and obligations of those involved in business transactions. Like the economic system of a country, the legal system is influenced by the prevailing political system (although it is also strongly influenced by historical tradition). The government of a country defines the legal framework within which firms do business—and often the laws that regulate business reflect the rulers’ dominant political ideology.
Because common law tends to be relatively ill specified, contracts drafted under a common law framework tend to be very detailed with all contingencies spelled out. In civil law systems, however, contracts tend to be much shorter and less specific because many of the issues typically covered in a common law contract are already covered in a civil code. Thus, it is more expensive to draw up contracts in a common law jurisdiction, and resolving contract disputes can be a very adversarial process in common law systems. But, common law systems have the advantage of greater flexibility and allow for judges to interpret a contract dispute in light of the prevailing situation. International businesses need to be sensitive to these differences; approaching a contract dispute in a state with a civil law system as if it had a common law system may backfire (and vice versa).
Along the same lines, in 1997 trade and finance ministers from the member states of the Organization for Economic Cooperation and Development (OECD), an association of the world’s 30 most powerful economies, adopted the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions. The convention obliges member states to make the bribery of foreign public officials a criminal offense.
Corruption has been well documented in every society, from the banks of the Congo River to the palace of the Dutch royal family, from Japanese politicians to Brazilian bankers, and from Indonesian government officials to the New York City Police Department. According to Transparency International, an independent nonprofit organization dedicated to exposing and fighting corruption, world wide businesses and individuals spend some $400 billion a year on bribes related to government procurement contracts alone.
Ownership rights over intellectual property are established through patents, copyrights, and trademarks. A patent grants the inventor of a new product or process exclusive rights for a defined period to the manufacture, use, or sale of that invention. Copyrights are the exclusive legal rights of authors, composers, playwrights, artists, and publishers to publish and disperse their work as they see fit. Trademarks are designs and names, often officially registered, by which merchants or manufacturers designate and differentiate their products
Benefits In the most general sense, the long-run monetary benefits of doing business in a country are a function of the size of the market, the present wealth (purchasing power) of consumers in that market, and the likely future wealth of consumers. International businesses need to be aware of this distinction, but they also need to keep in mind the likely future prospects of a country. In 1960 South Korea was viewed as just another impoverished Third World nation. By 2003 it was the world’s 11th largest economy, measured in terms of GDP. By identifying and investing early in a potential future economic star, international firms may build brand loyalty and gain experience in that country’s business practices. In contrast, late entrants may find that they lack the brand loyalty and experience necessary to achieve a significant presence in the market. In the language of business strategy, early entrants into potential future economic stars may be able to reap substantial first-mover advantages, while late entrants may fall victim to late-mover disadvantages. ( First-mover advantages are the advantages that accrue to early entrants into a market. Late-mover disadvantages are the handicap that late entrants might suffer from.) Costs A number of political, economic, and legal factors determine the costs of doing business in a country. With regard to political factors, the costs of doing business in a country can be increased by a need to pay off the politically powerful to be allowed by the government to do business. With regard to economic factors, one of the most important variables is the sophistication of a country’s economy. It may be more costly to do business in relatively primitive or undeveloped economies because of the lack of infrastructure and supporting businesses.As for legal factors, it can be more costly to do business in a country where local laws and regulations set strict standards with regard to product safety, safety in the workplace, environmental pollution, and the like (since adhering to such regulations is costly). Also, local laws that fail to adequately protect intellectual property can lead to the “theft” of an international business’s intellectual property, and lost income. Risks As with costs, the risks of doing business in a country are determined by a number of political, economic, and legal factors. Political risk has been defined as the likelihood that political forces will cause drastic changes in a country’s business environment that adversely affect the profit and other goals of a business enterprise. Social unrest can result in abrupt changes in government and government policy or, in some cases, in protracted civil strife. On the economic front, economic risks arise from economic mismanagement by the government of a country. Economic risks can be defined as the likelihood that economic mismanagement will cause drastic changes in a country’s business environment that hurt the profit and other goals of a particular business enterprise. When legal safeguards are weak, firms are more likely to break contracts and/or steal intellectual property if they perceive it as being in their interests to do so. Thus, legal risks might be defined as the likelihood that a trading partner will opportunistically break a contract or expropriate property rights. Overall Attractiveness The overall attractiveness of a country as a potential market and/or investment site for an international business depends on balancing the benefits, costs, and risks associated with doing business in that country.
