Chapter 3 – The Political and Legal Environments Facing Business

 

 

 

Multiple Choice Questions

 

WHAT IS A POLITICAL IDEOLOGY, AND HOW DOES IT AFFECT INTERNATIONAL BUSINESS?

 

1.      A(n) _______________ is the body of constructs, theories, and aims that constitutes a sociopolitical program.

a.      political ideology (moderate, page 83)

b.      economic ideology

c.       legal ideology

d.      technological ideology

 

2.      Most modern societies are _______________ politically, meaning different ideologies coexist because there is no one ideology that everyone accepts.

a.       universal

b.      pluralistic (moderate, page 83)

c.       limited

d.      totalitarian

 

3.      _______________ arises because groups within countries often differ significantly from each other in language, ethnic background, or religion.

a.       Universalism

b.      Totalitarianism

c.       Pluralism (moderate, page 83)

d.      Socialism

 

CONTRAST THE ATTRIBUTES OF DEMOCRACY AND TOTALITARIANISM

 

4.      A key element of _______________ is freedom in the areas of political rights and civil liberties.

a.       totalitarianism

b.      fascism

c.       communism

d.      democracy (easy, page 84)

 

5.      Contemporary democratic political systems share all of the following EXCEPT:

a.      unlimited terms for elected officials (moderate, page 85)

b.      freedom of opinion, expression, press, and freedom to organize

c.       elections in which voters decide who is to represent them

d.      a nonpolitical bureaucracy and defense infrastructure

 

6.      Which of the following is NOT a form of totalitarianism?

a.       fascism

b.      democracy  (easy, page 88)

c.       authoritarianism

d.      communism


 

COMPARE COMPANIES’ EASE OF OPERATIONS IN CENTRALIZED VERSUS DECENTRALIZED DEMOCRACIES.

 

7.      Which of the following statements regarding companies’ ease of operations in centralized versus decentralized democracies is FALSE?

a.       Canada gives significant political power to the provinces at the expense of its federal government.

b.      Companies may have difficulty determining how to act in decentralized democratic systems because they face many (sometimes conflicting) laws.

c.       A major difficulty in negotiating the Canada-U.S. Free Trade Agreement was that many provinces had common trade barriers.  (difficult, page 87)

d.      Because of different state tax systems in the United States, foreign companies need to locate their U.S. headquarters carefully.

 

8.      A major difficulty in negotiating the Canada-U.S. Free Trade Agreement was that many provinces had:

a.       common trade barriers.

b.      different cultures

c.       different monetary systems.

d.      their own trade barriers.  (moderate, page 87)

 

9.      Companies may have difficulty determining how to act in decentralized democratic systems because these systems have:

a.      many (sometimes conflicting) laws.  (moderate, page 87)

b.      different monetary units.

c.       similar cultures.

d.      strict nationalization laws.

 

WHAT ARE THE MAJOR INDICATORS FOR POLITICAL RIGHTS AND FOR CIVIL LIBERTIES?

 

10.    The major indicators for civil liberties are all of the following EXCEPT:

          a.   equality under the law for all individuals

          b.  the nationalization of foreign businesses (moderate, page 85)

          c.   the extent of personal social freedoms

          d.   the degree of freedom from extreme governmental indifference or corruption

 

11.    Which of the following is NOT a major indicator for political rights?

a.       The degree to which fair and competitive elections occur.

b.      The ability of voters to endow their elected representatives with real power.

c.       The ability to nationalize foreign businesses.  (moderate, page 85)

d.      The ability of people to organize into political parties of their choice.

 

12.    The ability of voters to endow their elected representatives with real power is an example of a:

a.       civil liberty.

b.      just cause.

c.       social freedom.

d.      political right.  (moderate, page 85)

 

13.    In which of the following do people vote for their representatives or ruling party and the ruling party selects the Prime Minister, who is the chief executive of the country?

a.       communist form of democracy

b.      totalitarianism

c.       parliamentary form of democracy (moderate, page 86)

d.      socialism


 

WHAT ARE THE MAJOR CHARACTERISTICS OF THE “PARTLY FREE” AND “NOT FREE” CATEGORIES OF COUNTRIES?

 

14.    _______________ countries enjoy limited political rights and civil liberties, often in the context of corruption, weak rule of law, ethnic strife, or civil war.

a.      Partly free (moderate, page 86)

b.      Free

c.       Not free

d.      Sustained

 

15.    _______________ countries deny their citizens basic rights and civil liberties.

a.       Free

b.      Not free (moderate, page 86)

c.       Partly free

d.      Sustained

           

 

LIST AND EXPLAIN THE DIFFERENT FORMS OF TOTALITARIANISM.

 

16.    In _______________, religious leaders are also the political leaders.

a.       secular totalitarianism

b.      democratic totalitarianism

c.       socialist totalitarianism

d.      theocratic totalitarianism (moderate, page 88)

 

17.    In _______________, the government often imposes order through military power.

a.      secular totalitarianism (moderate, page 88)

b.      theocratic totalitarianism

c.       democratic totalitarianism

d.      socialist totalitarianism

 

18.    In a _______________ state, a single party, individual, or group of individuals monopolizes political power and neither recognizes nor permits opposition. Only a few individuals participate in decision making.

a.       democratic

b.      totalitarian (easy, page 88)

c.       representative democratic

d.      theocratic democratic

 

19.    _______________ is a form of secular totalitarianism in which political and economic systems and philosophies are virtually inseparable.

a.       Democracy

b.      Socialism

c.       Communism (moderate, page 88)

d.      Representative democracy


 

WHAT IS MEANT BY POLITICAL RISK?

 

20.    _______________ is when international companies fear that the political climate in a foreign country will change in such a way that their operating position will deteriorate.

a.       Economic risk

b.      Cultural risk

c.       Market risk

d.      Political risk (moderate, page 89)

 

21.    Political risk tends to be more prevalent in _______________ regimes rather than _______________ regimes.

a.      totalitarian; democratic (moderate, page 89)

b.      democratic; totalitarian

c.       democratic; fascist

d.      democratic; communist

 

22.    Which of the following statements regarding political risk is FALSE?

a.       As managers evaluate countries as a potential place to do business, they need to be aware of political risk.

b.      The level of political risk is higher in democratic political regimes than that of totalitarian political regimes.  (difficult, page 89)

c.       Political risk is when international companies fear that the political climate in a foreign country will change in such a way that their operating position will deteriorate.

d.      Although political risks can occur in democratic as well as totalitarian political regimes, they tend to be more prevalent in totalitarian regimes.

 

WHAT ARE THE MAJOR TYPES AND CAUSES OF POLITICAL RISK?

 

23.    Political actions that may affect company operations adversely include all of the following EXCEPT:

a.       governmental takeovers of property, with or without compensation

b.      operational restrictions that impede the company’s ability to take certain actions

c.       earthquakes which cause a decrease in the supply of raw materials (easy, page 89)

d.      agitation that disrupts sales or causes damage to property or personnel

 

24.    Political risk may occur for all of the following reasons EXCEPT:

a.       opinions of political leadership

b.      civil disorder

c.       external relations

d.      country similarities (moderate, page 89)

 

25.    Governmental takeovers of property, with or without compensation is:

a.      a cause of political risk.  (easy, page 89)

b.      not a cause of political risk.

c.       common in democratic political systems

d.      not common in totalitarian political systems

 

WHAT IS THE DIFFERENCE BETWEEN MICRO AND MACRO POLITICAL RISK?

 

26.    If political actions are aimed only at specific foreign investments, they are known as:

a.       macro political risks

b.      micro political risks (moderate, page 90)

c.       universal political risks

d.      diversified political risks

 

27.    Which of the following political risks best describes the following situation? After NATO forces accidentally bombed the Chinese embassy in Belgrade, Yugoslavia, on May 7, 1999, demonstrators trashed KFC stores in China but did not touch Pizza Hut stores because the demonstrators thought KFC stores were American and Pizza Hut stores were not.

a.       macro political risk

b.      universal political risks

c.       micro political risk (moderate, page 90)

d.      diversified political risks

 

28.    If political actions affect a broad spectrum of foreign investors, they are called which of the following?

a.       micro political risks

b.      universal political risks

c.       diversified political risks

d.      macro political risks (moderate, page 90)

 

29.    Which of the following political risks best describes the following situation? After the communist revolution in Cuba, the takeover of property was aimed at all foreign investors regardless of industry, nationality, or whether or not the investors’ past behavior had been socially responsive.

a.      macro political risks (moderate, page 90)

b.      micro political risks

c.       universal political risks

d.      diversified political risks

 

COMPARE THE INDIVIDUALISTIC AND COMMUNITARIAN PARADIGMS CONCERNING GOVERNMENTAL INTERVENTION IN THE ECONOMY.

 

30.    The _______________ believes in minimal intervention in the economy.

a.       collectivistic paradigm

b.      individualistic paradigm (moderate, page 90)

c.       communitarian paradigm

d.      unguarded paradigm

 

31.    Which of the following paradigms believe in a limited role of government, in checks and balances, and have a high distrust of central government power? Government is essentially separate from business.

a.       collectivistic

b.      communitarian

c.       individualistic (moderate, page 90)

d.      guarded

 

32.    In a _______________, government tends to be prestigious, authoritative, and sometimes authoritarian. It is very hierarchical and may be either democratic, as in the case of Japan, or autocratic, as in the case of China.

a.       individualistic paradigm

b.      collectivistic paradigm

c.       guarded paradigm

d.      communitarian paradigm (moderate, page 90)

 

33.    Which of the following paradigms thrive on a respected, centralized bureaucracy with a stable political party or coalition in power?

a.      communitarian paradigm (moderate, page 90)

b.      individualistic paradigm

c.       collectivistic paradigm

d.      guarded paradigm


 

WHAT SHOULD A COMPANY’S POLITICAL STRATEGY INVOLVE?

 

 

35.    _______________ means marshaling whatever resources are necessary to accomplish the company’s political objectives.

a.       Identifying the issue

b.      Developing alternative strategies

c.       Implementing a strategy (moderate, page 92)

d.      Formulating strategies

 

36.    Which of the following is a lobbying organization that represents the interests of its members to the appropriate people in the U.S. government?

a.       the Ministry of Finance

b.      the Ministry of Religion

c.       the World Bank

d.      the United States-China Business Council (difficult, page 92)

 

CONTRAST COMMON LAW, CIVIL (CODIFIED) LAW, AND THEOCRATIC LAW

 

37.    _______________ is based on tradition, precedent, and custom and usage.

a.      Common law (moderate, page 93)

b.      Civil law

c.       Theocratic law

d.      Democratic law

 

38.    The _______________ is based on a detailed set of laws that make up a code.

a.       common law system

b.      civil law system (moderate, page 93)

c.       theocratic law system

d.      communist law system

 

39.    Which of the following types of legal systems is based on the courts’ interpretations of events?

a.       civil law system

b.      theocratic law system

c.       common law system (moderate, page 93)

d.      communist law system

 

40.    ______________ is based on religious precepts.

a.       Common law system

b.      Civil law system

c.       Communist law system

d.      Theocratic law system (moderate, page 93)


 

CONTRAST NATIONAL DIFFERENCES IN LEGAL SAFEGUARDS FOR PRODUCT LIABILITY.

 

41.    A major challenge that companies face in the global environment is best described by which of the following?

a.      dealing with product liability issues (difficult, page 94)

b.      dealing with cultural issues

c.       dealing with product profitability

d.      dealing with employee motivation

 

42.    Which of the following provides the best reason that Japanese consumers have less access to and assistance from the legal community in Japan than American consumers do in the United States?

a.       Lawyers in Japan are inferior to lawyers in the United States.

b.      There are fewer lawyers per capita in Japan than in the United States. (moderate, page 94)

c.       Lawyers in Japan do not concentrate in product liability issues.

d.      Lawyers in Japan do not concentrate on civil litigation.

 

43.    A far less aggressive move overseas is for law firms to do which of the following?

a.       set up foreign direct investment in other countries

b.      establish joint ventures with firms in other countries

c.       establish correspondent relationships with firms in other countries (moderate, page 94)

d.      set up subsidiaries in other countries

 

WHAT ARE THE IMPACTS OF LAWS ON INTERNATIONAL BUSINESS.

 

44.    Laws exist that govern all of the following cross-border activities EXCEPT:

a.       investment of capital

b.      payment of dividends to foreign investors

c.       customs duties on imports

d.      cultural differences (moderate, page 96)

 

45.    ______________ is the extension by a government of the application of its laws to foreign operations of companies.

a.      Extraterritoriality (moderate, page 96)

b.      Expropriation

c.       Nationalism

d.      Totalitarianism

 

46.    Which of the following statements regarding legal issues in international business is FALSE?

a.       National laws affect business within the country or business among countries.

b.      International laws cannot determine how a firm operates in transporting shipments across borders.  (moderate, page 96)

c.       Some national laws on local business activity influence both domestic and foreign companies.

d.      Laws exist that govern cross-border activities.


 

Essay Questions

 

47.    What is political ideology, and how does it affect international business?

 

         Answer

         A political ideology is the body of constructs, theories, and aims that constitute a sociopolitical program.  The liberal ideology of the Democratic Party and the conservative ideology of the Republican Party in the United States are examples of political ideologies. Most modern societies are pluralistic politically, meaning different ideologies coexist because there is no one ideology that everyone accepts.  Managers from the United States, where there are only two key political parties, might find it difficult to understand the political environment in a country where there are many different ideologies even within the political parties themselves. This makes it difficult for the manager to determine how to articulate the firm’s interests and how to influence policy making.

         (moderate, page 83)     

 

48.    What is the ultimate test of any political system, especially one that is pluralistic?

        

Answer

         The ultimate test of any political system is its ability to hold a society together despite pressures from different ideologies tending to split it apart.  The more different and strongly held the ideas are, the more difficult it is for a government to formulate policies that everyone can accept. 

         (moderate, page 83)

 

49.    Contrast the attributes of democracy and totalitarianism.

        

Answer

         Contemporary democratic political systems share the following:

a.     freedom of opinion, expression, press, and freedom to organize

b.    elections in which voters decide who is to represent them

c.     limited terms for elected officials

d.    an independent and fair court system with high regard for individual rights and property

e.     a nonpolitical bureaucracy and defense infrastructure

f.       an accessibility to the decision-making process

 

Totalitarianism political systems lack the characteristics identified for contemporary democratic political systems.

(moderate, page 84)

 

50.    Compare companies’ ease of operations in centralized versus decentralized democracies.

        

Answer

         Democracies differ not only in the amount of citizen participation in decision making but also in the degree of centralized control. The United States considers states’ rights important as a counterweight to encroaching intervention and control by the central government, even though it has a stronger federal government that a country such as Canada.  Companies may also have difficulty determining how to act in decentralized democratic systems because they face many laws.  For example, because of different state tax systems in the United States, foreign companies need to locate their U.S. headquarters carefully.

         (moderate, page 87)


 

51.    In a short essay, discuss the various types and forms of totalitarianism citing specific examples of each type.

 

         Answer

a.     Totalitarian governments are usually theocratic or secular. In theocratic totalitarianism, religious leaders are also the political leaders. This form is best exemplified in Middle Eastern Islamic countries such as Iran. In secular totalitarianism, the government often imposes order through military power. Examples of this form are found in Cambodia and Iraq. In a totalitarian state, a single party, individual, or group of individuals monopolizes political power and neither recognizes nor permits opposition. Only a few individuals participate in decision making.

b.    Totalitarianism takes several forms, including fascism, authoritarianism, and communism. Examples of fascist totalitarianism in the past include Germany under Hitler, Portugal under Salazar, and Spain under Franco. Examples of authoritarian totalitarianism include Chile under Pinochet, and South Africa prior to the end of apartheid and the initiation of black rule. Authoritarianism differs from fascism in that the former simply desires to rule people, while the latter desires to control people’s minds and souls, to covert them to its own faith. Communism is a form of secular totalitarianism in which political and economic systems are virtually inseparable. Communists believe in the equal distribution of wealth, which entails total government ownership and control of resources.

(moderate,  page 88)

 

52.    What are the major characteristics of the “not free” category of countries?

 

Answer

a.       “Not free” countries deny their citizens basic rights and civil liberties.  They comprise an increasingly smaller percentage of the total population of the world.

b.      “Not free” countries tend to fall into one of three different categories:

a.       they have a majority Muslim population and frequently confront the pressures of fundamentalist Islam,

b.      they are multi-ethnic societies in which power is not held by a dominant ethnic group (one that represents over two-thirds of the population), and or

c.       they are neocommunist or postcommunist transitional societies.

         (moderate, page 86)

 

53.    In a short essay, discuss the various types and causes of political risk.

 

         Answer

a.    Political actions that may affect company operations adversely are: governmental takeovers of property, either with or without compensation; operational restrictions that impede the company’s ability to take certain actions; and agitation that disrupts sales or causes damage or injury to property or personnel.

b.   Political risk may occur for the following reasons:

·         opinions of political leadership – political leaders’ opinions may change over time, and the leaders could be replaced by force or election with politicians whose views toward business and foreign investment are much less positive.

·         civil disorder – unrest may occur because of economic conditions, human rights violations, or group animosity within the society.

·         external relations – animosity between the host country and the foreign investor’s home country may result in work-stoppage protests, forced divestment of operations, and loss of supplies and markets. Animosity, especially war, between the host country and any other country may result in property damage and inability to get supplies or deliver goods.

(moderate, page 89)


 

54.    What is meant by political risk?

        

Answer

         Political risk is when international companies fear that the political climate in a foreign country will change in such a way that their operating position will deteriorate.  Although political risks can occur in democratic as well as totalitarian political regimes, they tend to be more prevalent in totalitarian regimes.

         (easy, page 89)

 

55.    In a short essay, discuss micro and macro political risk, citing specific examples of how each can be applied to international business.

 

         Answer

a.     If political actions are aimed only at specific foreign investments, they are known as micro political risks. For example, after NATO forces accidentally bombed the Chinese embassy in Belgrade, Yugoslavia on May 7, 1999, demonstrators trashed KFC stores in China but did not touch Pizza Hut stores, even though both were owned by Tricon Global Restaurants, a U.S.-based company. The Chinese, who were demonstrating primarily against the United States, targeted KFC, a well-known U.S. company, but left Pizza Hut untouched because they thought it was Italian-owned. Companies most likely to be affected by micro political risk are those that may have a considerable and visible impact on a given country because of their size, monopoly position, importance to their home country’s national defense, and dependence of other industries on them.

b.    If political actions affect a broad spectrum of foreign investors, they are macro political risks. For example, after the communist revolution in Cuba, the takeover of property was aimed at all foreign investors regardless of industry, nationality, or whether or not the investors’ past behavior had been socially responsive.

         (easy, page 90)

 

56.    In a short essay, discuss the individualistic and communitarian paradigms on the roles of governments.

 

         Answer

         The individualistic paradigm believes in minimal intervention in the economy. Individualistic states a belief in regulation, and they are likely to be democratic and economically free. They will handle market defects, such as entry barriers and insufficient consumer knowledge and power, but they will not intervene too much. They believe in a limited role of government, in checks and balances, and have a high distrust of central government power. Government is essentially separate from business. In a communitarian paradigm, government tends to be prestigious, authoritative, and sometimes authoritarian. It is very hierarchical and may be either democratic, as in the case of Japan, or autocratic, as in the case of China. They thrive on a respected, centralized bureaucracy with a stable political party or coalition in power.

         (moderate, page 90)

 

57.    In a short essay, describe the steps that a company must follow if it wants to establish an appropriate political strategy in its countries of operation.

 

         Answer

a.     Identify the issue. What is the specific issue facing a firm—trade barriers, environmental standards, worker rights?

b.    Define the political aspect of the issue. Does the government feel strongly about the specific issue, or is it of minimal concern?

c.     Assess the potential political action of other companies and special interest groups. What are the parties that are affected and able to generate political pressure?

d.    Identify important institutions and key individuals—legislatures, regulatory agencies, courts, and important personalities.

e.     Formulate strategies. What are the key objectives, the major alternatives, and the likely effectiveness of alternative strategies?

f.       determine the impact of implementation. What will be the public relations fallout in the home and host countries if the action taken is unpopular?

g.     select the most appropriate strategy to implement.

(difficult, page 92)

 

58.       Contrast common law, civil (codified) law, and theocratic law.

 

Answer

a.       Common law – The United States and the United Kingdom are examples of countries with a common law system. Common law is based on tradition, precedent, and custom and usage. The courts fulfill an important role in interpreting the law according to those characteristics. In a common law country, contracts tend to be detailed, with all contingencies spelled out.

b.      Civil law – also called a codified legal system, is based on a detailed set of laws that make up a code. Rules for conducting business transactions are a part of the code. Over 70 countries, including Germany, France, and Japan operate on a civil law basis. In a civil law country, contracts tend to be shorter and less specific because many of the issues that a common law contract would cover already are included in the civil code.

c.       Theocratic law – based on religious precepts. The best example of this system is Islamic law, which is found in Muslim countries. Islamic law is a moral rather than a commercial law and was intended to govern all aspects of life.

(moderate, page 93)

 

59.    In a short essay, discuss the various sources on which Islamic law is based.

 

         Answer

         Islamic law, which is found in Muslim countries, is based on the following sources.

a.     the Koran, the sacred text

b.    the Sunnah, or decisions and sayings of the Prophet Muhammad

c.     the writings of Islamic scholars, who derive rules by analogy from the principles established in the Koran and the Sunnah

d.    the consensus of Muslim countries’ legal communities

(easy, page 93)

 

60.    Contrast national differences in legal safeguards for product liability.

        

Answer

         Different legal systems provide different safeguards for consumers.  For example, it appears that Japanese consumers have less access to and assistance from the legal community in Japan than American consumers do in the United States, given that they have fewer lawyers per capita than does the United States. The Japanese legal system differs from the U.S. system in a variety of ways.  The Japanese federation of Bar Associations sets legal fees, foreign lawyers are prohibited from advising clients on Japanese law or from hiring local Japanese lawyers to do so, and advertising restrictions limit consumer information about legal services.

         (moderate, page 94)

 

61.    In a short essay, discuss the effects of national laws on international business.

 

         Answer

         Some national laws on local business activity influence both domestic and foreign companies, especially in the areas of health and safety standards, employment practices, antitrust prohibitions, contractual relationships, environmental practices, and patents and trademarks. Laws also exist that govern cross-border activities, such as the investment of capital, the payment of dividends to foreign investors, and customs duties on imports. International laws, such as treaties governing the cross-border transfer of hazardous waste, can also determine how a firm operates in transporting shipments across borders.

         (easy, page 96)