International Business Environments Operations 15 e Daniels

Chapter 3 The Political and Legal Environments Facing Business Copyright © 2015 Pearson Education,

Learning Objectives p p p 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 Copyright © 2015 Pearson Education, Inc. 3 -3

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

Introduction Every country has its own unique political and legal environment p Companies must determine where, when, and how to adjust their business practices without undermining the basis for success p Copyright © 2015 Pearson Education, Inc. 3 -6

Introduction Political and Legal Factors Influencing International Business Operations Copyright © 2015 Pearson Education,

The Political Environment Managers evaluate, monitor, and forecast political environments p 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 p Copyright © 2015 Pearson Education, Inc. 3 -8

Individualism vs. Collectivism Individualism n primacy of the rights and role of the individual p Collectivism n primacy of the rights and role of the community p Copyright © 2015 Pearson Education, Inc. 3 -9

Political Ideology A political ideology stipulates how society ought to function and outlines the methods by which it will do so p Most modern societies are pluralistic p n different groups champion competing political ideologies p Democrats vs. Republicans in the United States p Democratic Party vs. Liberal Party in Japan Copyright © 2015 Pearson Education, Inc. 3 -10

Spectrum Analysis A political spectrum outlines the various forms of political ideology p Political freedom measures p n n 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 Copyright © 2015 Pearson Education, Inc. 3 -11

Spectrum Analysis The Political Spectrum Copyright © 2015 Pearson Education, Inc. 3 -12

In practice, purely democratic and totalitarian systems are exceptions. Looking around the world, one sees many variations. For example, democratic systems range from radical on one side (advocates of extreme political reform) to reactionary (advocates of a return to past conditions). Likewise, totalitarian systems emphasize different degrees of state control. Fascism aims to control people’s minds, souls, and daily existence, whereas authoritarianism confines itself to political control of the state. The Political Spectrum Copyright © 2015 Pearson Education, Inc. 3 -13

Democracy p In a democracy n n n p 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 n n Representative Multiparty Parliamentary Social Copyright © 2015 Pearson Education, Inc. 3 -14

Representative Originates in a constitution that protects individual freedoms and liberties. The law treats all citizens, both public and private, equally. Elected representatives hold ultimate sovereignty but must act in the people’s interest. Officials represent voters and, while mindful of voters’ preferences, have the authority to act as they see fit. Examples include the United States and Japan. Multiparty A political system whereby three or more parties govern, either separately or as part of a coalition. The leadership of a single party cannot legislate policy without negotiating with opposition parties. Examples include Canada, Germany, Italy, and Israel. Parliamentary Citizens exercise political power by electing representatives to a legislative branch referred to as the parliament. The legislature is the source of legitimacy for the various ministers that run the executive branch. Examples include India and Australia. Social Applies democratic means to guide the transition from capitalism to socialism. The government promotes egalitarianism while also regulating capitalism’s tendency toward opportunism. Examples include Norway and Sweden. Copyright © 2015 Pearson Education, Inc. 3 -15

Democracy p In a democracy n n n Multiparty Democracy calls for participation by citizens in a fair and just decision-making process. Since it supports individualism, companies can make investment and operational decisions based on economic rather than political standards. Under a democracy, commerce and trade are promoted. Copyright © 2015 Pearson Education, Inc. 3 -16

Totalitarianism p A totalitarian system subordinates the individual to the interests of the collective n p dissent is eliminated through indoctrination, persecution, surveillance, propaganda, censorship, and violence Prominent types of totalitarianism include n Authoritarianism: The power of a few over them many—the individual is subordinated to the state; opposition is suppressed; business decisions bases upon political rather than economic standards n Fascism: Secular Theocratic n n Copyright © 2015 Pearson Education, Inc. 3 -17

Totalitarianism p A totalitarian system subordinates the individual to the interests of the collective n p dissent is eliminated through indoctrination, persecution, surveillance, propaganda, censorship, and violence Prominent types of totalitarianism include n Authoritarianism n Fascism: n Secular n Theocratic Copyright © 2015 Pearson Education, Inc. 3 -18

Fascism p Fascism: Fascism aims to control people’s minds, souls, and daily existence, whereas authoritarianism confines itself to political control of the state. n Secular n Theocratic Copyright © 2015 Pearson Education, Inc. 3 -19

Secular: A single-party government controls elections, tolerates dissent as long as it does not challenge the state, and suppresses other ideologies. p The state does not prescribe an all-encompassing ideology. It grants limited individual freedoms provided one does not contest state authority or disrupt social harmony. p Examples include China, Vietnam, and Venezuela. Copyright © 2015 Pearson Education, Inc. 3 -20

Theocratic p Theocratic Government is an expression of the preferred deity. Leaders claim to represent its interests on earth. Applies ancient dogma in place of modern principles. Strict social regulation and gender regimentation typically ensue. Examples include Iran, Afghanistan, and Saudi Arabia. Copyright © 2015 Pearson Education, Inc. 3 -21

The Standard of Freedom p Freedom House, an independent watchdog organization, assesses political and civil freedom around the world; Freedom House recognizes three types of political systems n n n Free: has open political competition, respect for civil liberties, independent civic life, and independent media. Partly free: has limited political rights and civil liberties, corruption, weak rules of law, ethnic and religious strife, unfair elections, and censorship. Not free: has few or no political rights and civil liberties Copyright © 2015 Pearson Education, Inc. 3 -22

The Standard of Freedom Map of Political Freedom, 2013 Copyright © 2015 Pearson Education,

The Standard of Freedom Map of Political Freedom, 2013 3 -24

Democracy is good for business Sarah Reppuci, Senior Director, Global Publications (August 3, 2015): https: //freedomhouse. org/blog/democ racy-good-business THE WORLD BANK: DOING BUSINESS Measuring Business Regulations http: //www. doingbusiness. org/ 3 -25

Third Wave of Democratization p Third Wave of Democratization n p number of democracies doubled in two decades Engines of Democracy 1. 2. 3. The failure of totalitarian regimes to deliver economic progress Improved communications technology Economic dividends of increasing political freedom Copyright © 2015 Pearson Education, Inc. 3 -27

Democracy: Recession and Retreat p Democracy’s retreat n just 26 of the world’s democracies are full democracies p Engines of Authoritarianism Political economy of growth n Rhetoric vs. Reality - Inconsistencies n Economic problems n Who defines Democracy? n Copyright © 2015 Pearson Education, Inc. 3 -28

Democracy: Recession and Retreat Freedom in the World: Gains and Declines Copyright © 2015

Political Ideology and the MNE p What will the political map look like in the future? n The Washington Consensus n The Beijing Consensus n The Clash of Civilizations Copyright © 2015 Pearson Education, Inc. 3 -30

Political Risk Learning Objective: Explain political risk management Copyright © 2015 Pearson Education, Inc.

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 p Types: p n n Systemic Procedural Distributive Catastrophic Copyright © 2015 Pearson Education, Inc. 3 -32

Classifying Political Risk Characteristics of Political Risk Copyright © 2015 Pearson Education, Inc. 3

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

The Legal Environment The legal system is the mechanism for creating, interpreting, and enforcing the laws in a specified jurisdiction p Types: p n n n Common law Civil law Theocratic law Customary law Mixed systems Copyright © 2015 Pearson Education, Inc. 3 -35

The Legal Environment The Wide World of Legal Systems Copyright © 2015 Pearson Education,

Trends in Legal Systems p What is the basis of rule in a country? n n The rule of man p legal rights derive from the individual who commands the power to impose them p associated with a totalitarian system The rule of law p systematic and objective laws applied by public officials who are held accountable for their administration p associated with a democratic system Copyright © 2015 Pearson Education, Inc. 3 -38

Trends in Legal Systems The Worldwide Practice of the Rule of Law Copyright ©

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

Operational Concerns p Operational issues n n p Starting a business Making and enforcing contracts Hiring and firing local workers Closing down the business In general n n rich countries regulate less poor countries regulate more Copyright © 2015 Pearson Education, Inc. 3 -41

Strategic Concerns p Country Characteristics p Product safety and liability p Legal jurisdiction p

Intellectual Property: Rights and Protection Intellectual property refers to creative ideas, expertise, or intangible insights that grant its owner a competitive advantage p Intellectual property rights refer to the right to control and derive the benefits from writing, inventions, processes, and identifiers p n no “global” patent, trademark or copyright exists Copyright © 2015 Pearson Education, Inc. 3 -43

Intellectual Property: Rights and Protection p Attitudes property towards intellectual Historical legacies p rule of man versus rule of law n Economic circumstances p levels of economic development n Cultural orientation p individualism versus collectivism n Copyright © 2015 Pearson Education, Inc. 3 -44

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