Chapter 3 – The Political and Legal Environments Facing Business

Chapter 3 – The Political and Legal Environments Facing Business  Political System  the structural dimensions and power dynamics of the government that o 1) Specify institutions, organizations, and interest groups and o 2) Define the norms and rules that govern political activities  Laissez-faire  The Government should not interfere in business affairs (individualistic approach)  Individualism  Individual freedom, self-expression, and personal independence are supreme o The direct opposite of collectivism o Central tenet: Individual economic and political freedoms are the ground rules on which society is based Collectivism  Collective goals are more important than individual goals o Individual rights are sacrificed for the good of the majority o In the modern world collectivism is expressed through socialism or communism       Political Ideology  encapsulates the doctrine of political behavior and change. It outlines the procedures for converting ideas into actions. Political Freedom  The degree to which fair and competitive elections occur, the extent to which individual and group freedoms are guaranteed, the legitimacy ascribed to rule of law, and the existence of freedom of expression Democracy  Government is by the people, exercised either directly or through elected representatives o Elected representatives are held accountable through safeguards o Types: representative, multiparty, parliamentary, social o Advantages:  People prefer to have choice over personal and economic decisions  People prefer freedom over control of their behavior o Disadvantages:  DifÏcult for individuals and groups to achieve national agreement  National policy can be slow and cumbersome to implement Totalitarianism  One person/party exercises absolute control over all spheres of human life (competing political parties are banned) o Types: Authoritarian, fascist, secularist, dictatorship, theocratic, tribal o Authoritarian parties often rely on shadowy politics, skewed elections, and nefarious secret agencies o Advantages:  Can permit fast and efÏcient national policy formation because there is no need to debate decisions  Enlightened and benevolent leaders can make good decisions in the national interest o Disadvantages:  The needs of individuals and private enterprises are subordinate to those of the state  Leaders can make poor decisions and may be corrupted by power Comparative Measures of Freedom  What will determine the future Global Ideology? o Democracy:  Failure of totalitarian regimes to deliver economic progress  Improved communication eroding totalitarian regimes’ control – spread  Freedom yielding economic dividends and progress o Totalitarianism:  One party systems yielding economic dividends and progress  Failed experiments toward democracy or failures in current systems  Recent global economic crises exposing weaknesses in democracies  Three types of political systems identified by Freedom House o Free, partly free, not free  Third Wave of Democratization  A global movement that expanded freedoms and civil liberties o Refers to the third surge of democratically governed states in the 20th century. Ultimately, as this wave crested, the number of countries led by a democratic government doubled. o However, several indicators show slowing adoption of democracy throughout the world. Powering the resurgence of totalitarianism is: o Strong states support strong performance o Gaps in the principles and practices of democracy o Economic insecurity following slowing growth o Escalating debate of the meaning of democracy   Political Ideologies in the Next Decade: o Washington Consensus:  Champion of Democracy  political competition is a right  Political and economic freedom should guide the system  Rule of law, property rights, and human rights are sacred  Trade policy can be used to advance political and human rights o Beijing Consensus:  Champion of one party system  approved ofÏcials protect the people and have their consent  Authoritarian capitalism should guide the system  Benevolent persuasion vs. iron fist to enforce action  Economic development and trade are used to create growth and harmonious society – separate from politics  Do not judge other systems nor be judged  Political Risk  The risk that political decisions, events, or conditions change a country’s business environment in ways that force investors to accept lower rates of return o Primary types of political risk, from most to least disruptive are:  Systemic Political Risk By influencing the macro business environment, affects the operation of all firms  Procedural Political Risk  Institutes impediments that constrain the flexibility of local operations  Distributive Political Risk  Gradually eliminates the local property rights of foreign companies  Catastrophic Political Risk  Devastates the business environment for all companies  Legal System  Specifies the rules that regulate behavior, the processes that enforce laws, and the procedures that resolve grievances Three components to legal systems: o Constitutional law  to guarantee open and just political order o Criminal law  to protect the social order by specifying what conduct is criminal, and prescribing punishment to those who breach standards o Civil and commercial law  to ensure the fairness and efÏciency of business transactions by stipulating private rights and specific remedies in order to regulate conduct between individuals and/or organizations   Legal Environment System Types o Common Law  Developed by judges through the decisions of courts  Relies on tradition, judge-made precedent and usage o Civil Law  Starts with systematic codification of laws. Judges find and apply established laws to current disputes (strictly). May not be easily modified. o Theocratic Law  Based on the inspirations and instructions of religious teachings o Customary Law  Based on norms and accepted behavior that gain legitimacy through long-term practice  Reflects the wisdom of daily experience    o Mixed System  Applies when a country uses 2 or more system types cumulatively or interactively. Key Points of Legal Systems o Managers cannot expect home country legal system to apply abroad o How the court system works and role of judges will differ greatly o Any type of business agreement will be fraught with risk o Legal system will definitely impact firm-government and firm-firm negotiations o On legal issues, managers should work hard to rely on good, reputable local service providers Rule of Man  The ruler and the rule are synonymous, whether the ruler is an individual or single party. o The ruling party is not usually subject to checks and balances Rule of Law  Governmental Authority is legitimately exercised in accordance with written and publically disclosed laws that have been appropriately adopted and enforced in an established procedure. o No individual is above the laws  Operational and Strategic Concerns from the Political and Legal Environment o Starting a business o Entering and enforcing contracts o Local worker relations  hiring and firing, health and safety standards, workweek o Closing down the business o Country of origin and local content o Marketplace behavior  rules of operation and competition practices o Product safety o Legal jurisdiction o Intellectual property rights and protection  Choice-of-law clause  a clause in contracts that stipulates whose laws, when necessary, govern dispute regulation o Used commonly by MNE’s in contracts  Intellectual Property (IP)  The creative ideas, innovative expertise, or intangible insights that create a competitive advantage for an individual, company, or country o Primary safeguard is an intellectual property right (IPR)  grants the registered owners of inventions, literary and artistic works, and symbols, names, images, or designs the right to determine the legal authority who may use the property and under what circumstances