The Political and Legal Environments Facing Business
! Discuss the different functions that political systems perform.
! Compare democratic and totalitarian political regimes and discuss how they can influence managerial decisions.
! Describe how management can formulate and implement strategies to deal with foreign political environments.
! Study the different types of legal systems and the legal relationships that exist between countries.
! Examine the major legal issues in international business.
When companies source, produce and/or market products in foreign countries, they may encounter challenging political and legal environments. Chapter 3 provides a conceptual foundation for the examination of the political and legal dimensions of international business operations. It compares major political regimes and discusses their potential influence upon the development and implementation of appropriate political and legal strategies. It also explores the major types of legal systems that exist today, as well as the legal relationships among countries. The chapter concludes with an examination of major legal issues in international business.
OPENING CASE: The
Swire Pacific Ltd., a major hong
prominent in Hong Kong business circles, is a subsidiary of British-based John
Swire & Sons, which has nearly 90% of its assets in
Teaching Tip: Carefully review the PowerPoint slides for Chapter 3. For additional visual summaries of key chapter points, also review text Figures:
· 3.1—Political and Legal Influences on International Business
· 3.2—The Political Spectrum.
For a multinational enterprise to succeed in countries with different political and legal environments, its management must carefully analyze the fit between its corporate policies and the political and legal conditions of each particular nation in which it operates.
II. THE POLITICAL ENVIRONMENT
A country’s political system integrates the various parts of its society into a viable, functioning whole. It also influences the extent to which government intervenes in business, and thus the way in which business is conducted both domestically and internationally.
III. BASIC POLITICAL IDEOLOGIES
A political ideology is the body of constructs, theories and aims that constitute a sociopolitical program (e.g., liberalism or conservatism). Pluralism indicates the coexistence of a variety of ideologies within a particular society. The ultimate test of any political system is its ability to hold a society together. While shared ideologies create bonds within and among countries, differing ideologies tend to split societies apart.
A. The Impact of Ideological Differences on National Boundaries
History, culture, politics and geography all contribute to the definition of national boundaries. When a political system collapses, those under the system often fragment into smaller sociopolitical groups. When operating in a foreign country, it is very important for managers to understand feelings that could cause political tension and instability.
B. The Political Spectrum
MNEs may be able to operate effectively in both democratic and totalitarian regimes, but democracies usually offer greater economic freedom and enact more legal statutes designed to safeguard individual and corporate rights.
Democracy. A democracy represents a political system in which
citizens participate in the decision-making and governance process, either
directly or through elected representatives. Contemporary democracies share the
following characteristics: freedom of opinion, expression and the press;
freedom to organize; free elections; an independent and fair court system; a
nonpolitical bureaucracy and defense infrastructure; and access to the
decision-making process. Nonetheless, in decentralized democracies (e.g.,
a. Political Rights and Civil Liberties. Political rights include fair and competitive elections, the empowerment of elected representatives, the right to organize and the protection of minorities. Civil liberties include freedom of the press, equality under the law and personal freedoms.
b. Stability in Democracies. Many democracies that have emerged since the early 1970s are fragile and unstable. At the same time, confidence in politicians and government has generally declined in many of the more mature democracies.
2. Totalitarianism. Totalitarianism represents a political system in which citizens seldom if ever participate in the decision-making and governance process; power is monopolized and opposition is neither recognized nor tolerated. In theocratic totalitarianism, religious leaders are also the political leaders. In secular totalitarianism, the government usually imposes order through military power. Variants of totalitarianism include fascism, authoritarianism and communism.
IV. THE IMPACT OF THE POLITICAL SYSTEM ON MANAGEMENT DECISIONS
A. Political Risk
Political risk reflects the expectation that the political climate in a foreign country will change in such a way that a firm’s operating position will deteriorate.
1. Types and Causes of Political Risk. Political actions that may adversely affect a firm’s operations would include government takeovers of property, operational restrictions and damage to property or personnel. In addition, civil unrest and disorder and antagonistic external relations (including boycotts and other forms of protest) may also negatively impact a firm’s operations.
2. Micro and Macro Political Risks. Micro political risks are those aimed only at specific foreign investments (e.g., a particular MNE), whereas macro political risks affect a broad spectrum of foreign investors.
B. Government Intervention in the Economy
When companies move abroad, management must deal with governments that may have different attitudes about their roles in their respective economies—attitudes which may be inconsistent over time. Under an individualistic paradigm the government believes in minimal interference in the economy; it may intervene to deal with market defects but generally promotes marketplace competition. Under a communitarian paradigm, however, whether democratic (Japanese) or authoritarian (Chinese) in nature, the government defines economic needs and priorities and partners with business in major ways.
V. FORMULATING AND IMPLEMENTING POLITICAL STRATEGIES
Formulating political strategies may be more complicated than formulating competitive marketplace strategies. Logical steps include: identifying the issues, defining the nature of the issues, assessing the potential actions of others, identifying key players, formulating alternative strategies, assessing the potential impact of particular activities and selecting and implementing the most appropriate strategy.
VI. THE LEGAL ENVIRONMENT
Managers must be aware of the legal systems in the countries in which their firms operate, the basic nature of the legal profession (both domestic and international) and the legal relationships that exist between and among countries. Legal systems differ both in terms of the nature of the system and the degree of independence of the judiciary from the political process.
A. Kinds of Legal Systems
Common Law. Common law originated in the
2. Civil Law. Civil law, also known as codified law, originated with the Romans and is based upon a detailed set of laws that make up a detailed code that includes rules for conducting business; courts play an important role in applying the law.
3. Theocratic Law. Theocratic law is based upon religious precepts. The best example is Islamic law, or Shair’a. The key for businesses is to adhere to the constraints of ancient Islamic laws while maintaining sufficient flexibility to operate in a modern global economy.
B. Consumer Safeguards
Different legal systems provide varying safeguards with respect to product liability and other legal issues. For example, access to and assistance from the legal community, legal fees and the ability to use foreign lawyers all differ across countries.
C. The Legal Profession
Although lawyers and law firms vary in terms of how they practice law and service clients, MNEs must use lawyers for a variety of services, such as negotiating contracts, formalizing agent-distributor relationships and protecting intellectual property. Just as MNEs have expanded abroad to take advantage of international business opportunities, law firms have expanded abroad to service their clients. The key for managers doing business overseas is to choose a law firm with the needed expertise and overseas connections, whether through the company’s own offices, a merger, or correspondent relationships.
D. Legal Issues in International Business
National laws may affect the business climate both within and beyond a country’s borders and pertain to both domestic and foreign firms. Areas addressed include health and safety standards, employment practices, antitrust prohibitions, contractual relationships, environmental practices, intellectual property, cross-border investment flows, tariffs and non-tariff barriers, to name but a few. In addition, international treaties among nations may also affect the nature and extent of business operations.
ETHICAL DILEMMAS AND SOCIAL RESPONSIBILITY:
Is “When in
Cultural relativism implies that there is no method for deciding whether particular behavior is really appropriate. However, it is possible to do so by seeking justification for that behavior; such justification is a function of cultural values (many of which are universal), legal principles and economic practices. Some people argue the legal justification for ethical behavior is the only truly important justification. However, that argument is insufficient because not everything that is unethical is illegal. Moral as well as legal concepts must be considered. Further, the law tends to be slow to develop in emerging areas of business concern. In addition, both laws and legal systems vary among countries. Civil law countries tend to have a large body of laws that specify legal behaviors, while common law countries tend to rely more on precedent than statutory regulations.
LOOKING TO THE FUTURE:
Will Democracy Survive?
There is a clear link between political and economic freedom and economic growth. However, democracy does not necessarily mean stability; in fact, in a transition economy political risk is often quite high. Some people argue if a country is to flourish as a democracy, certain preconditions such as economic development must be present. Others feel, however, that democracy is the result of having political leaders who exhibit both the determination and the skills required to assure democratization occurs.
Teaching Tip: Visit www.prenhall.com/daniels for additional information and links relating to the topics presented in Chapter 3. Refer your students to the on-line study guide, as well as the Internet exercises for Chapter 3.
CLOSING CASE: Newmont Mining in
were the key political problems facing Mr. Lahti and Newmont Mining in
When Newmont first began Indonesian operations in 1996, it worked directly with the central government. However, the unwillingness of current leaders to use Suharto’s tough tactics on local governments led to a substantial loss of power by the central government. Consequently businesses are now confused as to whether to follow the central or the regional government’s laws and policies. Further, local groups have found it the perfect time to demand greater social and environmental responsibility from companies operating in their regions.
How has the legal situation in
What are the environmental dimensions to gold mining in
With mounting evidence of pollution problems, Newmont has been under environmental scrutiny ever since the opening of the Minihasa mine. Local environmentalists claimed the tailings Newmont dumps into the ocean contain toxic levels of mercury and arsenic. Despite conducting an environmental risk assessment and detoxifying the tailings before dumping them into the ocean as ordered by the government, local activists continue to protest against Newmont’s operation. Others, however, believe the environmental problems are primarily caused by illegal miners who use antiquated mining practices to extract the gold; they also use mercury to separate the gold from the ore and then dump the waste into local rivers. Although Newmont attempted to work with the government in dealing with the illegal miners, the government failed to take action for fear of a demonstration against it.
4. Evaluate Mr. Lahti’s approach to solving Newmont’s problems. Could he have done anything differently?
At the time
Newmont established its mining operations in
Additional Exercises: Political and Legal Factors
Exercise 3.1. Ask students to discuss the difficulties faced when a country
changes from a totalitarian to a democratic political system. Then have the
students compare the political transition of a large country such as
Exercise 3.2. Ask students to identify companies, both domestic and foreign, that operate internationally. Then ask the students to explore the possible sources of political risk for each of those firms, given the countries in which they have a presence and the nature of their products and operations. Be sure to consider both the micro and macro types of risk.
Exercise 3.3. Identify the various home countries of students in your class. Then lead the class in a comparative analysis of some of the laws pertaining to (a) local business activities and (b) cross-border business activities under the following types of legal systems: common law, civil law, theocratic law and Asian law. Conclude by discussing the challenges of dealing with particular types of international business issues in the home countries of your students.