Chapter 2

THE POLITICAL, LEGAL, AND

TECHNOLOGICAL ENVIRONMENT
The broader political, legal, and technological environment
faced by international managers is changing rapidly. Changes
The World of International
in this environment are more common and rapid, presenting Management
challenges for managers seeking to respond and adapt to this
environment. Although there are many dimensions of the
Social Media and Political
OBJECTIVES OF THE CHAPTER

external environment relevant to international management,

economic considerations covered in the last chapter are Change
among the most important, along with cultural issues covered
in Part Two. However, the political, legal, regulatory, and tech-
nological dimensions also bear on the international manager in
T he struggle for government reform has traditionally
been a long, painful process. In the past, uprisings in
the Middle East were often violently and horrifically
highly significant ways. The objective of this chapter is to
repressed by corrupt dictators. Governments censored and
examine how the political, legal, regulatory, and technological
controlled news organizations, hiding the atrocities of war
environments have changed in recent years, and how these
from the view of the global community. For example, the
changes pose challenges and opportunities for international
true scale of the 1982 Hama massacre, where at least
managers. In Chapter 10, we return to some of these themes,
10,000 Syrian revolutionaries were killed by government
especially as they relate to political risk and managing the
forces, is still unclear. Over the last few years, however, the
political environment. In this chapter, we outline some of the
transparency of war and the resulting pace of change
major trends in the political, legal, and technological environ-
appear to be rapidly increasing.
ment that will shape the world in which international managers
The ongoing conflict in Syria, which arose in the wake of
will compete. The specific objectives of this chapter are
the “Arab Spring” that spread across Egypt, Tunisia, and Libya
1. INTRODUCE the basic political systems that characterize in the early 2010s, has been particularly impacted by the use
regions and countries around the world and offer brief of social media. Journalism, communication, and transparency
examples of each and their implications for international from within Syria have all been redefined by the use of social
management. media by ordinary citizens. Unlike past conflicts, the Syrian
civil war and resulting refugee crisis are unraveling in real time
2. PRESENT an overview of the legal and regulatory environ-
to a global audience in photos and videos through YouTube,
ment in which MNCs operate worldwide, and highlight differ-
Facebook, and Twitter.
ences in approach to legal and regulatory issues in different
jurisdictions.
Social Media as an Organizing Tool
3. REVIEW key technological developments, including the
While previous uprisings lacked widespread communication
growth of e-commerce, and discuss their impact on MNCs
tools, those engaged in the Syrian conflict are equipped with
now and in the future.
smartphones and social media. Syrian government loyalists,
Syrian revolutionaries, and the terrorist organization Islamic
State of Iraq and Syria (ISIS) have all utilized social media to
quickly and efficiently organize their supporters. In the early
years of the conflict, the pro-revolution Facebook group “The
Syrian Revolution 2011” swelled to nearly half a million mem-
bers, while the group supporting Syrian President Bashar al-
Assad had nearly 3 million. ISIS has released propaganda
videos on all forms of social media, and the terror group has
maintained multiple Twitter accounts in an attempt to recruit
internationally.
Evidence suggests that revolutionaries in particular have
mobilized successfully through social media. Inspired by videos
44
uploaded to YouTube showing the Syrian government harshly Social Media as a Journalistic Tool
cracking down on nonviolent protesters, nearly 100,000 Syrians In the early stages of the war, the Syrian government banned
organized via Facebook and staged a protest in Hama in international news media from covering the revolution. As a
June 2011. The strength in numbers afforded by social media result, social media became the primary source of photos,
has made the Syrian protests incredibly difficult to dissolve; videos, and news stories from inside the conflict. The Syrian
the mass scale of protests organized through social networking civil war represented one of the first major conflicts in which
sites far outnumbers the military and government forces sent citizens could instantly record video from the front lines and,
to suppress them. Tips on how to protect oneself from tear using smartphones, transmit that footage to the Internet in real
gas and police batons are shared through Facebook groups, time. News organizations, unable to gather information from
and Twitter has served as a communication lifeline when gov- any other source, used the uploaded social media to build
ernment authorities have attempted to disperse the crowds.1,2 their reports.9
Social media has provided such a powerful tool to revolu- Syrians from all sides of the conflict created and shared
tionaries that the Syrian government has attempted to completely this content on various social networking sites, attempting to
disrupt Internet service on several occasions since 2011, most build international support for their cause.10 The sheer amount
notably during massive protests demanding the removal of of content uploaded is staggering; over a million videos from
President Bashar al-Assad. Widespread outages spread within the revolution were uploaded to YouTube, often taken
through nearly all of Syria, including Damascus, essentially by cellular phone. Another website, OnSyria, was used by pro-
shutting off all communication with the outside world.3 Cyber testors to upload nearly 200,000 videos.
attacks have also been perpetrated by supporters of the Syrian More importantly, smartphones and social networks
government in an attempt to censor photos and videos coming ensured that any human rights violations from either revolu-
from the protesters; malware programs that steal Facebook tionaries or the government would be broadcast online, likely
and YouTube logins have been dispatched on a massive scale.4 eroding any international support that the inflicting party had.
Smartphones have morphed into a symbol of the revolutionary In August 2013, one of the most defining moments in the
forces, with Syrian government soldiers and ISIS border guards early years of the war occurred when hundreds of civilians
often demanding to inspect cell phones of anyone passing were killed in a sarin gas chemical attack in Ghouta, allegedly
through their posts.5 perpetrated by the Syrian government. Almost instantly, wit-
Those fleeing the conflict have also utilized social media nesses and first responders uploaded photos and video of the
to plan safe escape from Syria. Refugees who successfully aftermath to social networking sites including YouTube, Reddit,
migrated to Europe assist those still making the journey and Twitter. These images marked a critical turning point in
through online activity. A Facebook group dedicated to sharing the global public opinion and international involvement in the
knowledge and advice with fellow refugees has over 100,000 war. The U.S. government had taken a hands-off approach
members. Topics range from necessary supplies and route prior to the attacks; however, once these human rights viola-
information to messages of encouragement. Smugglers, often tions were broadcast across social media, the U.S. had no choice
necessary for safe passage, are recommended and discussed, but to take a formal stand against the Syrian government.11
and even weather conditions are relayed to those making the
journey by sea.6,7 Refugees in past conflicts often separated Social Media as a Support-Building Tool
from their family and friends with the unfortunate yet realistic Unlike written news releases, pictures and videos have the
possibility that they would never reunite. During the Syrian ability to convey information in emotional ways that transcend
conflict, refugees have been able to send messages to their language. During the Syrian civil war, social media, used as a
loved ones and update them on their safety throughout their visual medium, led the global community to unite behind the
journey.8 WhatsApp, the instant messaging application, is plight of the Syrian refugees in an unprecedented way.
popular among refugees not only for familial communication Throughout early 2015, images and videos of overloaded
but also for its ability to connect with transportation, smug- rafts, filled with desperately fleeing Syrians, dominated social
glers, and even Greek coast guard officials in the event of media. The emotion and suffering of the refugees were con-
an emergency. veyed through these images to a worldwide audience in real
45
46 Part 1 Environmental Foundation

time. Though thousands of images, stories, and videos were 200,000 times within 24 hours. In the United States, the
shared over various social networks during the crisis, the United Kingdom, and Canada, the hashtag “#RefugeesWelcome”
September 2015 photo of a deceased toddler, Aylan Al-Kurdi, swelled to 1.5 million shares.12 Within four days, 78 percent of
who had drowned during his family’s attempted escape on a the British public had seen the photo of Al-Kurdi, and 92 per-
raft across the Mediterranean, provoked global outcry and cent had at least heard about it. The photo was directly linked
underscores the power of social media as a support-building to increased support: Those who had seen the photo were
tool. As a direct result of this image, financial and emotional nearly twice as likely to say that the United Kingdom should
support among the global community grew almost instantly. take in more refugees.13 Support in the form of financial
World leaders, including French President François Hollande, donations also surged. Migrant Offshore Aid Station, an NGO
British Prime Minister David Cameron, and Irish Prime Minister focused on search and rescue efforts, reported a 1,400 per-
Enda Kenny, publically expressed support and shock after cent increase in donations in the 24 hours immediately after
seeing the picture of the toddler. Spreading across social the pictures went viral. Donations to organizations including
networks almost instantly, the hashtag “#kiyiyavuraninsanlik,” Oxfam and Care Canada doubled in one week what had been
meaning “Humanity Washed Ashore,” was shared more than raised all year.14

The role of social media as an organizing tool, a journalistic tool, and a support-building
tool, all in the context of political change, underscores the interesting interactions of
technological progress and political conflict and change. Social media has enabled revo-
lutionaries, governments, journalists, and even terrorists to organize quickly, communi-
cate globally, and build support for their cause, resulting in serious ramifications for
international management. It is important for international managers to think through
these complex political, legal, and technological issues that arise in a world that embraces
rapid change so that they are prepared for potential challenges. MNCs must collabora-
tively work with new governments as laws, policies, and regulations are introduced and
altered. Managing the political and legal environment will continue to be an important
challenge for international managers, as will the rapid changes in the technological envi-
ronment of global business.

■ Political Environment
Both domestic and international political environments have a major impact on MNCs.
As government policies change, MNCs must adjust their strategies and practices to
accommodate the new perspectives and actual requirements. Moreover, in a growing
number of regions and countries, governments appear to be less stable; therefore, these
areas carry more risk than they have in the past. The assessment of political risk and
strategies to cope with it will be given specific attention in Chapter 10, but in this chap-
ter we focus on general political systems with selected areas used as illustrations relevant
to today’s international managers.
The political system or system of government in a country greatly influences how
its people manage and conduct business. We discussed in Chapter 1 how the government
regulates business practices via economic systems. Here we review the general systems
currently in place throughout the world. Political systems vary greatly between nation-
states across the world. The issue with understanding how to conduct international man-
agement extends beyond general knowledge of the governmental practices to the
specifics of the legal and regulatory frameworks in place. Underlying the actions of a
government is the ideology informing the beliefs, values, behavior, and culture of the
nation and its political system. We discussed ideologies and the philosophies underpin-
ning them above. Effective management occurs when these different ideologies and
philosophies are recognized and understood.
A political system can be evaluated along two dimensions. The first dimension
focuses on the rights of citizens under governments ranging from fully democratic to
totalitarian. The other dimension measures whether the focus of the political system is
Chapter 2 The Political, Legal, and Technological Environment 47

on individuals or the broader collective. The first dimension is the ideology of the system,
while the second measures the degree of individualism or collectivism. No pure form of
government exists in any category, so we can assume that there are many gradations
along the two extremes. The observed correlation suggests that democratic societies
emphasize individualism, while totalitarian societies lean toward collectivism.15

Ideologies
Individualism Adopters of individualism adhere to the philosophy that people should individualism
be free to pursue economic and political endeavors without constraint. This means that The political philosophy
government interest should not solely influence individual behavior. In a business con- that people should be free
text, this is synonymous with capitalism and is connected to a free-market society, as to pursue economic and
discussed in Chapter 1, which encourages diversity and competition, compounded with political endeavors without
constraint (Chapter 2); the
private ownership, to stimulate productivity. It has been argued that private property is
tendency of people to look
more successful, progressive, and productive than communal property due to increased
after themselves and their
incentives for maintenance and focus on care for individually owned property. The idea immediate family only
is that working in a group requires less energy per person to achieve the same goal, but (Chapter 4).
an individual will work as hard as he or she has to in order to survive in a competitive
environment. Simply following the status quo will stunt progress, while competing will
increase creativity and progress. Modern managers may witness this when dealing with
those who adopt an individualist philosophy and then must work in a team situation.
Research has shown that team performance is negatively influenced by those who con-
sider themselves individualistic; however, competition stimulates motivation and
encourages increased efforts to achieve goals.16
The groundwork for this ideology was founded long ago. Philosophers such as
David Hume (1711–1776), Adam Smith (1723–1790), and even Aristotle (384–322 BC)
contributed to these principles. While philosophers created the foundation for this belief
system long ago, it can be witnessed playing out through modern practice. Eastern
Europe, the former Soviet Union, areas of Latin America, Great Britain, and Sweden all
have moved toward the idea that the betterment of society is related to the level of free-
dom individuals have in pursuing economic goals, along with general individual free-
doms and self-expression without governmental constraint. The well-known movement
in Britain toward privatization was led by Prime Minister Margaret Thatcher during her
11 years in office (1979–1990), when she successfully transferred ownership of many
companies from the state to individuals and reduced the government-owned portion of
gross national product from 10 to 3.9 percent. She was truly a pioneer in the movement
toward a capitalistic society, which has since spread across Europe.
International managers must remain alert as to how political changes may impact
their business, as a continuous struggle for a foothold in government power often affects
leaders in office. For example, Britain’s economy improved under the leadership of Tony
Blair; however, his support of the Iraq War severely weakened his position. Conservative
David Cameron, first elected prime minister in 2010, sought to integrate traditional con-
servative principles without ignoring social development policies, something the Labour
Party has traditionally focused on. More recently, however, increased concerns about
immigration and the role of the EU in managing affairs in member states prompted the
United Kingdom to vote to leave the EU, a process that has been termed “Brexit.” Gov-
ernment policy, in its attempt to control the economic environment, waxes and wanes,
something the international manager must be keenly sensitive to.
Europe has added complexity to the political environment with the unification of
the EU, which celebrated its 60th “birthday” in 2017. Notwithstanding the increasing
integration of the EU, MNCs still need to be responsive to the political environment of
individual countries, some due to the persistence of cultural differences, which will be
discussed in Chapter 5. Yet, there are also significant interdependencies. For example,
the recent economic crises in Greece, Spain, Portugal, and Ireland have prompted
Germany and France to mobilize public and private financial support, even though the
48 Part 1 Environmental Foundation

two largest economies in the euro zone have residual distrust from earlier eras of conflict
and disagreement.17 Europe is no longer a group of fragmented countries; it is a giant
and expanding interwoven region in which international managers must be aware of what
is happening politically, not only in the immediate area of operations but also throughout
the continent. The EU consists of countries that adhere to individualistic orientations as
well as those that follow collectivist ideals.

collectivism Collectivism Collectivism views the needs and goals of society at large as more im-
The political philosophy portant than individual desires.18 The reason there is no one rigid form of collectivism
that views the needs or is because societal goals and the decision of how to keep people focused on them differ
goals of society as a whole greatly among national cultures. The Greek philosopher Plato (427–347 BC) believed
as more important than that individual rights should be sacrificed and property should be commonly owned.
individual desires (Chapter 2);
While on the surface one may assume that this would lead to a classless society, Plato
the tendency of people to
believed that classes should still exist and that the best suited should rule over the
belong to groups or
collectives and to look after people. Many forms of collectivism do not adhere to that idea.
each other in exchange for Collectivism emerged in Germany and Italy as “national socialism,” or fascism.
loyalty (Chapter 4). Fascism is an authoritarian political ideology (generally tied to a mass movement) that
considers individual and other societal interests inferior to the needs of the state and
seeks to forge a type of national unity, usually based on ethnic, religious, cultural, or
racial attributes. Various scholars attribute different characteristics to fascism, but the
following elements are usually seen as its integral parts: nationalism, authoritarianism,
militarism, corporatism, collectivism, totalitarianism, anticommunism, and opposition to
economic and political liberalism.
We will explore individualism and collectivism again in Chapter 4 in the context
of national cultural characteristics.

socialism Socialism Socialism directly refers to a society in which there is government ownership
A moderate form of of institutions but profit is not the ultimate goal. In addition to historically communist states
collectivism in which there such as China, North Korea, and Cuba, socialism has been practiced to varying degrees in
is government ownership of recent years in a more moderate form—“democratic socialism”—by Great Britain’s Labour
institutions, and profit is not Party, Germany’s Social Democrats, as well as in France, Spain, and Greece.19
the ultimate goal.
Modern socialism draws on the philosophies of Karl Marx (1818–1883), Friedrich
Engels (1820–1895), and Vladimir Ilyich Lenin (1870–1924). Marx believed that govern-
ments should own businesses because in a capitalistic society only a few would benefit,
and it would probably be at the expense of others in the form of not paying wages due
to laborers. He advocated a classless society where everything was essentially communal.
Socialism is a broad political movement and forms of it are unstable. In modern times,
it branched off into two extremes: communism and social democracy.
Communism is an extreme form of socialism that was realized through violent
revolution and was committed to the idea of a worldwide communist state. During the
1970s, most of the world’s population lived in communist states. The communist party
encompassed the former Soviet Union, China, and nations in Eastern Europe, Southeast
Asia, Africa, and Latin America. Cuba, Nicaragua, Cambodia, Laos, and Vietnam headed
a notorious list. Today much of the communist collective has disintegrated. China still
exhibits communism in the form of limiting individual political freedom. China has
begun to move away from communism in the economic and business realms because it
has discovered the failure of communism as an economic system due to the tendency of
common goals to stunt economic progress and individual creativity.
Some transition countries, such as Russia, are postcommunist but still retain aspects
of an authoritarian government. Russia presents one of the most extreme examples of
how the political environment affects international management. Poorly managed
approaches to the economic and political transition resulted in neglect, corruption, and
confusing changes in economic policy.20 Devoid of funds and experiencing regular gas
pipeline leaks, toxic drinking water, pitted roads, and electricity shutoffs, Russia did not
present attractive investment opportunities as it moved away from communism. Yet more
Chapter 2 The Political, Legal, and Technological Environment 49

companies are taking the risk of investing in Russia because of increasing ease of entry,
the new attempt at dividing and privatizing the Unified Energy System, and the move-
ment by the Kremlin to begin government funding for the good of society including
education, housing, and health care.21 Actions by the Russian government over the past
few years, however, continue to call into question the transparency and reliability of the
Russian government. BP, Exxon Mobil, and Ikea have each encountered de facto expro-
priation, corruption, and state-directed industrialization (see The World of International
Management at the beginning of Chapter 10).
One of the biggest problems in Russia and in other transition economies is cor-
ruption, which we will discuss in greater depth in Chapter 3. The 2014 Corruption
Perception Index from Transparency International ranked Russia 136th out of 174 coun-
tries, falling behind Egypt and Colombia.22 Brazil, China, and India, part of the BRIC
emerging markets block, consistently score higher than Russia. In the 2015 Heritage
Foundation’s Index of Economic Freedom, Russia’s overall rating in the measurement of
economic openness, regulatory efficiency, the rule of law, and competitiveness remained
at 52.1 this year, ranking it only 2.1 points away from being a repressive economic busi-
ness environment.23 As more MNCs invest in Russia, these unethical practices will face
increasing scrutiny if political forces can be contained. To date, some multinationals feel
that the risk is too great, especially with corruption continuing to spread throughout the
country. Despite the Kremlin’s support of citizens, Russia is in danger of becoming a
unified corrupt system. Still most view Russia as they do China: Both are markets that
are too large and potentially too lucrative to ignore.
Social democracy refers to a socialist movement that achieved its goals through
nonviolent revolution. This system was pervasive in such Western nations as Australia,
France, Germany, Great Britain, Norway, Spain, and Sweden, as well as in India and
Brazil. While social democracy was a great influence on these nations at one time or
another, in practice it was not as viable as anticipated. Businesses that were nationalized
were quite inefficient due to the guarantee of funding and the monopolistic structure.
Citizens suffered a hike in both taxes and prices, which was contrary to the public inter-
est and the good of the people. The 1970s and 1980s witnessed a response to this unfair
structure with the success of Britain’s Conservative Party and Germany’s Christian Dem-
ocratic Party, both of which adopted free-market ideals. Margaret Thatcher, as mentioned
previously, was a great leader in this movement toward privatization. Although many
businesses have been privatized, Britain still has a central government that adheres to
the ideal of social democracy. With Britain facing severe budget shortfalls, Prime Min-
ister David Cameron, first elected in 2010, proposed a comprehensive restructuring of
public services that could further alter the country’s longstanding commitment to a broad
social support program. Under his administration, austerity measures, including cuts to
military and social program spending, were implemented. The Conservatives and David
Cameron were reelected in a landslide in 2015, however, the Brexit vote was seen as a
repudiation to Cameron and he later resigned.24
It is important to note here the difference between the nationalization of businesses
and nationalism. The nationalization of businesses is the transference of ownership of a
business from individuals or groups of individuals to the government. This may be done
for several reasons: The ideologies of the country encourage the government to extract
more money from the firm, the government believes the firm is hiding money, the gov-
ernment has a large investment in the company, or the government wants to secure wages
and employment status because jobs would otherwise be lost. Nationalism, on the other
hand, is an ideal in and of itself whereby an individual is completely loyal to his or her
nation. People who are a part of this mindset gather under a common flag for such
reasons as language or culture. The confusing thing for the international businessperson
is that it can be associated with both individualism and collectivism. Nationalism exists
in the United States, where there is a national anthem and all citizens gather under a
common flag, even though individualism is practiced in the midst of a myriad of cultures
and extensive diversity. Nationalism also exists in China, exemplified in the movement
50 Part 1 Environmental Foundation

against Japan in the mid-1930s and the communist victory in 1949 when communist
leader Mao Tse-tung gathered communists and peasants to fight for a common goal. This
ultimately led to the People’s Republic of China. In the case of modern China, nationalism
presupposes collectivism.

Political Systems
There are two basic anchors to political systems, each of which represents an “ideal type”
that may not exist in pure form.

democracy Democracy Democracy, with its European roots and strong presence in Northern and
A political system in which Western Europe, refers to the system in which the government is controlled by the citi-
the government is zens either directly or through elections. Essentially, every citizen should be involved in
controlled by the citizens decision-making processes. The representative government ensures individual freedom
either directly or through since anyone who is eligible may have a voice in the choices made.
elections.
A democratic society cannot exist without at least a two-party system. Once elected,
the representative is held accountable to the electorate for his or her actions, and this
ultimately limits governmental power. Individual freedoms, such as freedom of expression
and assembly, are secured. Further protections of citizens include impartial public service,
such as a police force and court systems that also serve the government and, in turn, the
electorate, though they are not directly affiliated with any political party. Finally, while
representatives may be reelected, the number of terms is often limited, and the elected
representative may be voted out during the next election if he or she does not sufficiently
adhere to the goals of the majority ruling. As mentioned above, a social democracy com-
bines a socialist ideology with a democratic political system, a situation that has charac-
terized many modern European states as well as some in Latin America and other regions.

totalitarianism Totalitarianism Totalitarianism refers to a political system in which there is only one
A political system in which representative party, which exhibits control over every facet of political and human life.
there is only one Power is often maintained by suppression of opposition, which can be violent. Media
representative party, which censorship, political repression, and denial of rights and civil liberties are dominant ide-
exhibits control over every als. If there is opposition to government, the response is imprisonment or even worse
facet of political and
tactics, often torture. This may be used as a form of rehabilitation or simply a warning
human life.
to others who may question the government.
Because only one party within each entity exists, there are many forms of totalitarian
government. The most common is communist totalitarianism. Most dictatorships under the
communist party disintegrated by 1989, but as noted above, aspects and degrees of this
form of government are still found in Cuba, North Korea, Laos, Vietnam, and China. The
evolution of modern global business has substantially altered the political systems in Viet-
nam, Laos, and China, each of which has moved toward a more market-based and plural-
istic environment. However, each still exhibits some oppression of citizens through denial
of civil liberties. The political environment in China is very complex because of the gov-
ernment’s desire to balance national, immediate needs with the challenge of a free-market
economy and globalization. Since joining the WTO in 2001, China has made trade liber-
alization a top priority. However, MNCs still face a host of major obstacles when doing
business with and in China. For example, government regulations severely hamper multi-
national activity and favor domestic companies, which results in questionable treatment
such as longer document processing times for foreign firms.25 This makes it increasingly
difficult for MNCs to gain the proper legal footing. The biggest problem may well be that
the government does not know what it wants from multinational investors, and this is what
accounts for the mixed signals and changes in direction that it continually sends. All this
obviously increases the importance of knowledgeable international managers.
China may be moving further away from its communist tendencies as it begins
supporting a more open, democratic society, at least in the economic sphere. China
continues to monitor what it considers antigovernment actions and practices, but there
Chapter 2 The Political, Legal, and Technological Environment 51

is a discernible shift toward greater tolerance of individual freedoms.26 For now, China
continues to challenge the capabilities of current international business theory as it tran-
sitions through a unique system favoring high governmental control yet striving to
unleash a more dynamic market economy.27
Though the most common, the totalitarian form of government exhibited in China
is not the only one. Other forms of totalitarianism exhibit other forms of oppression as
well. Parties or governments that govern an entity based on religious principles will
ultimately oppress religious and political expression of its citizens. Examples are Iran
and Saudi Arabia, where the laws and government are based on Islamic principles. Con-
ducting business in the Middle East is, in many ways, similar to operating a business in
the Western world. The Arab countries have been a generally positive place to do busi-
ness, as many of these nations are seeking modern technology and most have the finan-
cial ability to pay for quality services. Worldwide fallout from the war on terrorism; the
rise of ISIS; the Afghanistan, Iraq, and Syrian wars; and the ongoing Israel–Arab con-
flicts, however, have raised tensions in the Middle East considerably, making the business
environment there risky and potentially dangerous.
The 2011 Arab Spring uprisings have affected business dealings in the authoritar-
ian and/or totalitarian countries across northern Africa and the Middle East. Reasons for
the political unrest varied, but most commonly included factors were oppressive govern-
ment rule, economic decline, high unemployment, and human rights violations. Protest-
ers successfully overthrew four government regimes and forced reforms in almost a dozen
others. The political and economic fallout from the Arab Spring, including the Syrian
civil war discussed in the opening section of this chapter, has left the business environ-
ment with much continued uncertainty. Production and GDP were negatively affected
almost overnight, and fuel prices spiked globally. Supply chain routes were disrupted for
months, increasing the shipping and logistical costs of goods passing through the region.
In Egypt, a military coup overthrew democratically elected Egyptian President Morsi in
2013, and a military general was elected president in a suspect election in 2014. In Libya,
the fall of Gaddafi has resulted in a power vacuum, inviting increased acts of terrorism.
Unemployment in Egypt and Tunisia has not recovered since the uprisings, and inflation
remains around 10 percent.28 According to a late 2011 study by Grant Thornton, 26
percent of businesses in North America, and 22 percent of businesses globally, reported
negative effects from the uprisings.29 A map of the countries that were impacted by the
Arab Spring can be seen in Figure 2–1. Though many countries in the region have

Figure 2–1
Tunisia Syria Summary of Arab Spring
Lebanon
Iraq Uprisings
Morocco Jordan
Algeria Kuwait
Western Libya Egypt
Sahara Saudi
Arabia

Mauritania
Oman
Sudan Yemen

Somalia

Civil war Government overthrown Governmental changes Protests

Source: Original graphic by Ben Littell under supervision of Professor Jonathan Doh.
 A Closer Look
The Economic Impacts of Global Terrorism

A New Challenge for the International impact. There is some evidence that terrorism nega-
Business Community tively impacts other sectors of the economy as well.
As discussed in the opening section of this chapter, According to a report issued by financial services firm
social media has made global communication easier, Markit, manufacturing and service providers grew at a
which unfortunately includes the orchestration of terror- slower rate in November 2015 than expected. Service
ist attacks. Global terrorism is a relatively new challenge; providers specifically stated that the terrorist attacks in
no longer are terrorist attacks small, one-person events Paris contributed to negative performance and a
isolated to a particular region or country. Over the last decrease in consumer confidence. Some estimates
decade, attacks in Madrid, London, and Paris have suggest that the November attacks could ultimately
involved a high degree of complexity and organization. cost the French economy tens of billions of euros.
Organizations like ISIS are recruiting worldwide through Despite these setbacks, the long-term economic
social networking sites, working to organize attacks far impact from terrorist attacks does not appear to be sub-
from their home base in Syria. Living in an intercon- stantial. Past terrorist attack locations, such as New York
nected world, it would be naïve to believe that the threat City, quickly rebounded from short-term economic set-
of terrorism does not affect the international business backs. Stock market volatility following previous terror
community. attacks has always stabilized fairly quickly, indicating a
Evidence shows that the tourism industry appears to continued confidence from investors despite living in a
be especially impacted by the threat of terrorism, at world with this new type of uncertainty. The global econ-
least in the short term. According to the Paris Conven- omy faces a variety of challenges in the 21st century—
tion and Visitors Bureau, the November 2015 terrorist climate change, political tensions, and demographic
attacks in Paris, which killed 130 civilians, resulted in a shifts, to name a few. Global terrorism, like these other
sudden, yet temporary, decline in tourism activity. Res- challenges, will likely continue to cause some disruption
taurants, shops, and related businesses lost revenue, to the international business community, but it will not
and hotels reported that the number of visitors declined stop economic progress.
sharply in the weeks following the attacks. Forty per-
cent of hotel bookings in Brussels were cancelled the
weekend following the Paris attacks, when suspected Sources: Walker, Andrew, “Paris Attacks: Assessing the economic
terrorist apartments were raided in Belgium. In places impact,” BBC, December 2, 2015. http://www.bbc.com/news/
business-34965000; “Market Flash France PMI,” Markit Economics,
like France, where seven percent of economic activity
November 23, 2015. https://www.markiteconomics.com/; Newton-
and nearly two million jobs are dependent on tourism, Small, Jay, “The Cost of the Paris Attacks,” Time, November 23, 2015.
even a slight decrease in visitors has a high economic http://time.com/4123827/paris-attacks-tourism/.

somewhat stabilized, the fallout from the revolutions will continue to impact international
business.
One final form of totalitarianism, sometimes referred to as “right-wing,” allows for
some economic (but not political) freedoms. While it directly opposes socialist and com-
munist ideas, this form may gain power and support from the military, often in the form
of a military leader imposing a government “for the good of the people.” This results in
military officers filling most government positions. Such military regimes ruled in
Germany and Italy from the 1930s to the 1940s and persisted in Latin America and Asia
until the 1980s, when the latter moved toward democratic forms. Recent examples include
Myanmar, where the military ruled as a dictatorship from 1962 to 2011.

■ Legal and Regulatory Environment

One reason why today’s international environment is so confusing and challenging for
MNCs is that they face so many different laws and regulations in their global business
operations. These factors affect the way businesses are developed and managed within
host nations, so special consideration must be paid to the subtle differences in the legal
codes from one country to another. Adhering to disparate legal frameworks sometimes
prevents large MNCs from capitalizing on manufacturing economies of scale and scope
within these regions. In addition, the sheer complexity and magnitude of bureaucracies
52
Chapter 2 The Political, Legal, and Technological Environment 53

require special attention. This, in turn, results in slower time to market and greater costs. Islamic law
MNCs must take time to carefully evaluate the legal framework in each market in which Law that is derived from
they do business before launching products or services in those markets. interpretation of the Qur’an
There are four foundations on which laws are based around the world. Briefly and the teachings of the
summarized, these are Prophet Muhammad and is
found in most Islamic
1. Islamic law. This is law derived from interpretation of the Qur’an and the countries.
teachings of the Prophet Muhammad. It is found in most Islamic countries in
the Middle East and Central Asia. socialist law
Law that comes from the
2. Socialist law. This law comes from the Marxist socialist system and contin- Marxist socialist system and
ues to influence regulations in former communist countries, especially those continues to influence
from the former Soviet Union, as well as present-day China, Vietnam, North regulations in countries
Korea, and Cuba. Since socialist law requires most property to be owned by formerly associated with the
the state or state-owned enterprises, MNCs have traditionally shied away from Soviet Union as well as
these countries. China.
3. Common law. This comes from English law, and it is the foundation of the common law
legal system in the United States, Canada, England, Australia, New Zealand, Law that derives from
and other nations. English law and is the
4. Civil or code law. This law is derived from Roman law and is found in the foundation of legislation in
non-Islamic and nonsocialist countries such as France, some countries in the United States, Canada,
Latin America, and even Louisiana in the United States. and England, among other
nations.
With these broad notions serving as points of departure, the following sections
civil or code law
discuss basic principles and examples of the international legal environment facing
Law that is derived from
MNCs today.
Roman law and is found in
the non-Islamic and
Basic Principles of International Law nonsocialist countries.
When compared with domestic law, international law is less coherent because its sources principle of sovereignty
embody not only the laws of individual countries concerned with any dispute but also An international principle
treaties (universal, multilateral, or bilateral) and conventions (such as the Geneva Conven- of law that holds that
tion on Human Rights or the Vienna Convention of Diplomatic Security). In addition, governments have the right
international law contains unwritten understandings that arise from repeated interactions to rule themselves as they
among nations. Conforming to all the different rules and regulations can create a major see fit.
problem for MNCs. Fortunately, much of what they need to know can be subsumed under
nationality principle
several broad and related principles that govern the conduct of international law. A jurisdictional principle of
international law that holds
Sovereignty and Sovereign Immunity The principle of sovereignty holds that gov- that every country has
ernments have the right to rule themselves as they see fit. In turn, this implies that one jurisdiction over its citizens
country’s court system cannot be used to rectify injustices or impose penalties in another no matter where they are
country unless that country agrees. So while U.S. laws require equality in the workplace located.
for all employees, U.S. citizens who take a job in Japan cannot sue their Japanese em-
territoriality principle
ployer under the provisions of U.S. law for failure to provide equal opportunity for them. A jurisdictional principle of
international law that holds
International Jurisdiction International law provides for three types of jurisdictional that every nation has the
principles. The first is the nationality principle, which holds that every country has right of jurisdiction within
jurisdiction (authority or power) over its citizens no matter where they are located. There- its legal territory.
fore, a U.S. manager who violates the American Foreign Corrupt Practices Act while
protective principle
traveling abroad can be found guilty in the United States. The second is the territoriality
A jurisdictional principle of
principle, which holds that every nation has the right of jurisdiction within its legal international law that holds
territory. Therefore, a German firm that sells a defective product in England can be sued that every country has
under English law even though the company is headquartered outside England. The third jurisdiction over behavior
is the protective principle, which holds that every country has jurisdiction over behav- that adversely affects its
ior that adversely affects its national security, even if that conduct occurred outside the national security, even if the
country. Therefore, a French firm that sells secret U.S. government blueprints for a conduct occurred outside
satellite system can be subjected to U.S. laws. that country.
54 Part 1 Environmental Foundation

doctrine of comity Doctrine of Comity The doctrine of comity holds that there must be mutual respect
A jurisdictional principle of for the laws, institutions, and governments of other countries in the matter of jurisdiction
international law that holds over their own citizens. Although this doctrine is not part of international law, it is part
that there must be mutual of international custom and tradition.
respect for the laws,
institutions, and Act of State Doctrine Under the act of state doctrine, all acts of other governments
governments of other are considered to be valid by U.S. courts, even if such acts are inappropriate in the United
countries in the matter of
States. As a result, for example, foreign governments have the right to set limits on the
jurisdiction over their own
repatriation of MNC profits and to forbid companies from sending more than this amount
citizens.
out of the host country back to the United States.
act of state doctrine
A jurisdictional principle Treatment and Rights of Aliens Countries have the legal right to refuse admission of
of international law that foreign citizens and to impose special restrictions on their conduct, their right of travel,
holds that all acts of other where they can stay, and what business they may conduct. Nations also can deport aliens.
governments are considered
For example, the United States has the right to limit the travel of foreign scientists com-
to be valid by U.S. courts,
ing into the United States to attend a scientific convention and can insist they remain
even if such acts are illegal
or inappropriate under within five miles of their hotel. After the horrific events of 9/11, the U.S. government
U.S. law. began greater enforcement of laws related to illegal aliens. As a consequence, closer
scrutiny of visitors and temporary workers, including expatriate workers from India and
elsewhere who have migrated to the United States for high-tech positions, may result in
worker shortages.30

Forum for Hearing and Settling Disputes This is a principle of U.S. justice as it
applies to international law. At their discretion, U.S. courts can dismiss cases brought
before them by foreigners; however, they are bound to examine issues including where
the plaintiffs are located, where the evidence must be gathered, and where the property
to be used in restitution is located. One of the best examples of this principle is the
Union Carbide pesticide plant disaster in Bhopal, India. Over 2,000 people were killed
and thousands left permanently injured when a toxic gas enveloped 40 square kilome-
ters around the plant. The New York Court of Appeals sent the case back to India for
resolution.

Examples of Legal and Regulatory Issues

The principles described above help form the international legal and regulatory frame-
work within which MNCs must operate. In the following, we examine some examples
of specific laws and situations that can have a direct impact on international business.

Financial Services Regulation The global financial crisis of 2008–2010 underscored

the integrated nature of financial markets around the world and the reality that regulatory
failure in one jurisdiction can have severe and immediate impacts on others.31 The global
contagion that enveloped the world was exacerbated, in part, by the availability of global
derivatives trading and clearing and the relatively lightly regulated private equity and
hedge fund industries. The crisis and its broad economic effects have prompted regulators
around the world to consider tightening aspects of financial services regulation, espe-
cially those related to the risks associated with the derivatives activities of banks and
their involvement in trading for their own account. In the United States, financial reform
legislation was approved in July of 2010, although the degree to which that legislation
would prevent another crisis remained hotly debated.32 The nearby Closer Look box
provides a comparison of proposed and implemented financial reform approaches across
the globe.

Foreign Corrupt Practices Act During the special prosecutor’s investigation of the
Watergate scandal in the early 1970s, a number of questionable payments made by U.S.
corporations to public officials abroad were uncovered. These bribes became the focal
Chapter 2 The Political, Legal, and Technological Environment 55

point of investigations by the U.S. Internal Revenue Service, Securities and Exchange
Commission (SEC), and Justice Department. This concern over bribes in the international
arena eventually culminated in the 1977 passage of the Foreign Corrupt Practices Act Foreign Corrupt Practices
(FCPA), which makes it illegal to influence foreign officials through personal payment Act (FCPA)
or political contributions. The objectives of the FCPA were to stop U.S. MNCs from An act that makes it illegal
initiating or perpetuating corruption in foreign governments and to upgrade the image of to influence foreign
both the United States and its businesses abroad. officials through personal
payment or political
Critics of the FCPA feared the loss of sales to foreign competitors, especially in
contributions; became U.S.
those countries where bribery is an accepted way of doing business. Nevertheless, the
law in 1977 because of
U.S. government pushed ahead and attempted to enforce the act. Some of the countries concerns over bribes in the
that were named in early bribery cases under the law included Algeria, Kuwait, Saudi international business
Arabia, and Turkey. The U.S. State Department tried to convince the SEC and Justice arena.
Department not to reveal countries or foreign officials who were involved in its investi-
gations for fear of creating internal political problems for U.S. allies. Although this
political sensitivity was justified for the most part, several interesting developments
occurred: (1) MNCs found that they could live within the guidelines set down by the
FCPA and (2) many foreign governments actually applauded these investigations under
the FCPA because it helped them crack down on corruption in their own country.
One analysis reported that since passage of the FCPA, U.S. exports to “bribe prone”
countries actually increased.33 Investigations reveal that once bribes were removed as a
key competitive tool, more MNCs were willing to do business in that country. This
proved to be true even in the Middle East, where many U.S. MNCs always assumed that
bribes were required to ensure contracts. Evidence shows that this is no longer true in
most cases; and in cases where it is true, those companies that engage in bribery face a
strengthened FCPA that now allows the courts to both fine and imprison guilty parties.
In addition, stepped-up enforcement appears to be having a real impact. A report from
the law firm Jones Day found that FCPA actions are increasingly targeting individual
executives, not just corporations; that penalties imposed under the FCPA have skyrocketed;
and that violations have spurred a number of collateral civil actions.34

Bureaucratization Very restrictive foreign bureaucracies are one of the biggest prob-
lems facing MNCs. This is particularly true when bureaucratic government controls are
inefficient and left uncorrected. A good example is Japan, whose political parties feel
more beholden to their local interests than to those in the rest of the country. As a result,
it is extremely difficult to reorganize the Japanese bureaucracy and streamline the ways
things are done because so many politicians are more interested in the well-being of their
own districts than in the long-term well-being of the nation as a whole. In turn, parochial
actions create problems for MNCs trying to do business there. The administration of
Prime Minister Junichiro Koizumi of Japan tried to reduce some of this bureaucracy,
although the fact that Japan has had seven different prime ministers from 2006 to 2015
has not helped these efforts. Certainly the long-running recessionary economy of the
country is inspiring reforms in the nation’s antiquated banking system, opening up the
Japanese market to more competition.35
Japanese businesses are also becoming more aware of the fact that they are depen-
dent on the world market for many goods and services and that when bureaucratic red
tape drives up the costs of these purchases, local consumers pay the price. These busi-
nesses are also beginning to realize that government bureaucracy can create a false sense
of security and leave them unprepared to face the harsh competitive realities of the
international marketplace.
In many developing and emerging markets, bureaucratic red tape impedes business
growth and innovation. The World Bank conducts an annual survey to determine the ease
of doing business in a variety of countries around the world. The survey includes indi-
vidual items related to starting a business, dealing with construction permits, employing
workers, registering property, getting credit, protecting investors, paying taxes, trading
across borders, enforcing contracts, and closing a business. A composite ranking, as
 A Closer Look
Comparing Recent Global Financial Reforms

Preventing More Tax-Funded Bailouts Corporations face costlier hedging as there will be
The G20 wants to end the belief among banks that they heavier capital charges on uncleared trades, but differ-
are “too big to fail” by requiring resolution mechanisms ences in exemption scope could be exploited.
and “living wills” for speedy windups that don’t destabi-
lize markets. As a legislative body for a unified country,
the United States’ Senate was able to set up an “orderly Bonuses
liquidation” process fairly quickly through Title II of the The G20 has introduced principles to curb excessive
Dodd-Frank Act. Japan’s Diet passed similar reforms by pay and bonuses, such as requiring a big chunk of a
amending its existing Deposit Insurance Act in 2013. bonus to be deferred over several years with a claw-
The EU, as a collection of 28 states with no common back mechanism. The United States and the EU are
insolvency laws, faces a much harder task of thrashing applying these principles and taking their own actions,
out a pan-EU mechanism even though cross-border such as a one-off tax in Britain.
banks dominate the sector. To ensure that resolution Winners/Losers: Harder to justify big bonuses in the
funds can quickly be collected and paid even when future.
banks cross international borders, the European Com-
mission established a centralized banking union in
2012. This banking union essentially transfers the leg- Credit Ratings Agencies
islating of banking policies from individual nations to the The G20 agreed that ratings agencies should be required
EU as a whole. Two major initiatives have resulted from to register, report to supervisors, and show how they man-
this shift: the Single Supervisory Mechanism (SSM) and age internal conflicts of interest. In 2014 the EU adopted
the Single Resolution Mechanism (SRM). The SSM, which even stricter laws, increasing the disclosure requirements
became operational in 2014, supervises the financial regarding fees charged by credit rating agencies. Also in
health of banking institutions across Europe. The SRM, 2014, the Securities and Exchange Commission in the
which came into force on January 1, 2016, provides United States adopted stricter requirements for credit rat-
restructuring assistance to failing EU banks. The SRM is ing agencies, aimed at preventing conflicts of interest and
funded through contributions made by other banking increasing standards and transparency.
institutions, thereby protecting taxpayers. Winners/Losers: Ratings agencies will have to justify
Winners/Losers: Banks face an extra levy on top of what they do much more in the future. The “Big Three”—
higher capital and liquidity requirements. Taxpayers Fitch, S&P, and Moody’s—may face more competition in
should be better shielded. Messy patchwork for global the EU. The sector faces more efforts to dilute their role
banks, which will come under pressure to “subsidiarize” in determining bank capital requirements.
operations in different countries.
Hedge Funds/Private Equity
Over-the-Counter Derivatives
The United States and the EU are working in parallel to
The G20 agreed that derivatives should be standard- introduce a G20 pledge to require hedge fund manag-
ized where possible so they can be centrally cleared ers to register and report a range of data on their posi-
and traded on an exchange by the end of 2012; three- tions. U.S. law is in line with G20 but exempts private
quarters of the G20 members were able to meet this equity and venture capital. The EU wants to go much
deadline. Some countries have taken reforms a step further by including private equity and requiring third-
further. The U.S. Senate adopted legislation (Dodd-Frank country funds and managers to abide by strict require-
Act) requiring banks to spin off their swaps desk to iso- ments if they want to solicit European investors, a step
late risks from depositors, and, in 2014, Canada the United States says is discriminatory. Managers of
expanded the ability of banking regulators to set restric- alternative funds in the EU would also have curbs on
tions over banks that trade standard derivatives. remuneration, an element absent from U.S. reform.
However, some disagreement has risen between the Winners/Losers: U.S. hedge fund managers may find
EU and the U.S. within the international derivatives mar- it harder to do business in the EU. European investors
ket. Between 2014 and 2016, regulators in Europe and may end up with less choice. Regulators will have better
the United States were unable to agree on whether each data on funds. EU managers may decamp to Switzer-
other’s clearinghouse rules were equivalent. Without an land, though also for tax reasons.
agreement, European traders would have faced higher
capital requirements, likely resulting in less transnational
trading. In 2016, the EU and the United States finally Banks Trading
reached a deal on the oversight of clearinghouses, pav- The U.S. Senate has adopted the “Volcker Rule,” which
ing the way for a more unified global market. would ban risky trading unrelated to customers’ needs
Winners/Losers: Cross-border trading within the at deposit-insured banks. The Volcker Rule’s associated
United States and the EU will continue uninterrupted. regulations were fully implemented in the United States

56
Chapter 2 The Political, Legal, and Technological Environment 57

in 2014. Similar regulation in Europe has been slower The EU has approved new rules to beef up capital
to take shape. Many key EU states are against the rule on trading books and allow supervisors to slap extra
as they want to preserve their universal banking model, capital requirements if remuneration is encouraging
though, in 2015, the European Commission sent a pro- excessively risky behavior. Additional rules were imple-
posal to the European Parliament for consideration. mented to strengthen corporate governance and
Winners/Losers: Some trading could switch to the EU increase transparency.
from the United States inside global banks. Winners/Losers: Bank return on equity is set to be
squeezed. Regulators will have many more tools to
control the sector. Higher costs are likely to be passed
Systemic Risk
on to consumer investors. There could be timing issues
The G20 wants mechanisms in place to spot and tackle as the EU has been more willing than the United States
systemwide risks better, a core lesson from the crisis. in the past to adopt Basel rules.
The U.S. Senate bill sets up a council of regulators that
includes the Federal Reserve, but the U.S. House wants
a bigger role for the Fed. The EU has approved a reform Fixing Securitization
that will make the European Central Bank the hub of a
The U.S. Senate bill forces securitizers to keep a base-
pan-EU systemic risk board.
line 5 percent of credit risk on securitized assets. The
Winners/Losers: ECB is a big winner with an enhanced
EU has already approved a law to this effect.
role that many see as a platform for a more pervasive
Winners/Losers: Banks say privately the 5 percent
role in the future. Banks will have yet another pair of
level is low enough not to make much difference and
eyes staring down at them.
that the key problem is restoring investor confidence
into the tarnished sector.
Bank Capital Requirements
The push to beef up bank capital and liquidity require-
Sources: Tracy, Ryan; McGrane, Victoria; Baer, Justin, “Fed Lifts Capi-
ments is being led by the global Basel Committee of
tal Requirements for Banks,” The Wall Street Journal, July 20, 2015;
central bankers and supervisors, which is toughening up “SEC Adopts Credit Rating Agency Reform Rules,” US Securities and
its global accord as requested by the G20. It took at the Exchange Commission, August 27, 2014; Brush, Silla; Verlaine, Julia-
end of 2012. The U.S. bill directs regulators to increase Ambra, “EU, U.S. Reach Deal on Clearing Rules for Derivatives Mar-
capital requirements on large financial firms as they ket,” BloombergBusiness, February 10, 2016; Mayeda, Andrew,
“Canada to Increase Regulation of Over-the-Counter Derivatives,”
grow in size or engage in riskier activities. In 2015, the BloombergBusiness, February 11, 2014; “Factbox: Comparing EU
Federal Reserve further increased the capital require- and U.S. Financial Reform,” Reuters, May 19, 2010. Additional
ments for the eight largest banks. research by authors.

shown in Table 2–1, ranks the overall ease of doing business in these countries. Although
developed countries generally rank better (higher), there are some developing countries
(Georgia, Malaysia) that do well, and some developed economies (Greece) that do poorly.
In Table 2–1 economies are ranked on their ease of doing business, from 1 to 189,
with first place being the best. A high ranking on the ease-of-doing-business index means
the regulatory environment is conducive to the operation of business. This index averages
the country’s percentile rankings on 10 topics, made up of a variety of indicators, giving
equal weight to each topic. The rankings are benchmarked to June 2015.

Privatization
Another example of the changing international regulatory environment is the current
move toward privatization by an increasing number of countries. The German govern-
ment, for example, has sped up privatization and deregulation of its telecommunications
market. This has opened a host of opportunities for MNCs looking to create joint ventures
with local German firms. Additionally, the French government has put some of its busi-
nesses on the sale block. Meanwhile, in China the government is slowly moving forward
with plans to partially privatize many of its state-owned enterprises. In late 2015, the
Chinese government announced reforms allowing private investment in state-owned
enterprises. These reforms are likely aimed at increasing the profitability of the
Table 2-1
Ease-of-Doing-Business Ranking among Select Countries (2015)
Ease of
Doing Dealing
Business with Trading
(Overall) Starting a Construction Getting Registering Getting Protecting Paying across Enforcing Resolving
Economy Rank Business Permits Electricity Property Credit Investors Taxes Borders Contracts Insolvency
Singapore 1 10 1 6 17 19 1 5 41 1 27
United Kingdom 6 17 23 15 45 19 4 15 38 33 13
United States 7 49 33 44 34 2 35 53 34 21 5
Sweden 8 16 19 7 11 70 14 37 17 24 19
Finland 10 33 27 16 20 42 66 17 32 30 1
Taiwan 11 22 6 2 18 59 25 39 65 16 21
Australia 13 11 4 39 47 5 66 42 89 4 14
Germany 15 107 13 3 62 28 49 72 35 12 3
Ireland 17 25 43 30 39 28 8 6 48 93 20
Malaysia 18 14 15 13 38 28 4 31 49 44 45
Georgia 24 6 11 62 3 7 20 40 78 13 101
France 27 32 40 20 85 79 29 87 1 14 24
United Arab Emirates 31 60 2 4 10 97 49 1 101 18 91
Japan 34 81 68 14 48 79 36 121 52 51 2
Kazakhstan 41 21 92 71 19 70 25 18 122 9 47
Russian Federation 51 41 119 29 8 42 66 47 170 5 51
Greece 60 54 60 47 144 79 47 66 27 132 54
Bahrain 65 140 9 77 25 109 111 8 85 101 85
Saudi Arabia 82 130 17 24 31 79 99 3 150 86 189
Kenya 108 151 149 127 115 28 115 101 131 102 144
Indonesia 109 173 107 46 131 70 88 148 105 170 77
Brazil 116 174 169 22 130 97 29 178 145 45 62
Argentina 121 157 173 85 116 79 49 170 143 38 95
Cambodia 127 180 181 145 121 15 111 95 98 174 82
India 130 155 183 70 138 42 49 152 127 184 116
Pakistan 138 122 61 157 137 133 25 171 169 151 94
Ethiopia 146 176 73 129 141 167 166 113 166 84 114
Gambia, the 151 169 117 153 124 162 163 177 104 110 111
Zimbabwe 155 182 184 161 114 79 81 145 100 166 152
Bolivia 157 178 150 101 143 126 144 189 124 136 92
Niger 160 134 178 169 126 133 166 156 158 154 121
Iraq 161 154 147 106 117 181 115 59 178 122 189
Bangladesh 174 117 118 189 185 133 88 86 172 188 155
Central African Republic 185 189 155 186 167 133 150 185 144 177 149
Venezuela, RB 186 186 125 171 129 109 178 188 186 141 165

Source: The World Bank, “Table 1.1: Rankings on the Ease of Doing Business,” Doing Business 2015, p. 6, www.doingbusiness.org/rankings.
 International Management in Action
Bitcoin and other Decentralized Currencies in the Digital Age
Alternative, extra-governmental currencies have sparked times of currency uncertainty. In 2015, when Greece’s
the interest of many due to the global nature of online inability to meet its debt repayment schedule led to
transactions. In the past, these virtual currencies were restrictions on bank withdrawals and growing uncer-
centrally controlled and often quickly shut down by gov- tainty for the future of the European Union, Bitcoin saw
ernmental regulations. Virtual currencies in the early a surge in activity across Europe. In July, the number of
2000s, such as “E-gold” and “Liberty Reserve,” were Greeks registering to buy and sell Bitcoin increased ten-
prone to criminal activity and illegal transactions. These fold, and trades increased by 79 percent. Bitcoin mar-
virtual currencies acted more as businesses than as kets in Germany, Poland, and China saw large increases
peer-to-peer transaction devices, and the currencies in activity from Greek computers.
provided little flexibility in real, everyday use. Governments appear to be cautiously open to the
In 2008, a paper published online by Satoshi Naka- use of Bitcoin within their borders. Almost every country
moto, titled “Bitcoin: A Peer-to-Peer Electronic Cash Sys- allows the use of Bitcoin for private transactions. The
tem,” outlined a new concept for digital currency, in which United States and EU have issued only modest warnings
open peer-to-peer transactions replace the need for cen- regarding the use of digital currencies, and few legal
tralized currency oversight and regulation. Little is known regulations exist. In 2015, the United States officially
about “Satoshi Nakamoto,” with many now believing that recognized Bitcoin as a commodity.
the name is a pseudonym for a group of individuals. In Bitcoin’s growth has not been completely smooth. A
2009, Nakamoto released the first peer-to-peer Bitcoin series of rapid increases and decreases in the value of
software and issued the first round of currency. Unlike its a Bitcoin, from US$0.08 in 2010 to over US$1,200 in
predecessors, Bitcoin is easy to use when purchasing 2013, has led to many economists, including former U.S.
real, tangible goods. In recent years, Bitcoin has quickly Federal Reserve Chairman Alan Greenspan, to declare
grown into the most widely used digital currency. the currency a bubble. Though the currency has stabi-
Like traditional paper currency, Bitcoin depends on lized to a value of between US$200 and US$400 in
faith of the users for the system to work. Rather than recent years, rapid price swings are still commonplace.
relying on a central bank, Bitcoin relies on a decentral- Illegal activity, including drug trafficking and money
ized ledger system to maintain the overall value within laundering, does occur through Bitcoin marketplaces,
the market. On a basic level, every registered user main- though the open ledger concept behind the currency
tains a copy of the ledger, which displays the individual makes these activities easier to trace. As a digital cur-
balance of Bitcoin for every other user. Transactions in rency, malware and computer viruses have also led to
Bitcoin are, in essence, just the debiting and crediting some limited instances of theft. Bitcoin’s encryption,
of those balances. The open, public sharing of the value however, is still regarded as strong.
of the transactions occurring in Bitcoin is essential, as Bitcoin appears to be reaching a tipping point. While
this allows for the role of the central banking institution some economists insist that Bitcoin will ultimately sink to
to be completely replaced, thereby “decentralizing” the a value of zero, others predict that the currency will rise
currency. As of February 2016, the market capitalization to a value of over US$40,000. Perhaps the ultimate suc-
of Bitcoin was about US$6 billion. More than 1,000 cess or failure of Bitcoin as a digital currency lies not in
retailers, both online and in brick-and-mortar locations, its own design, but in the uncertainties that led to its initial
now accept Bitcoin. rise in popularity. If consumers continue to cast doubt over
Bitcoin and other decentralized digital currencies government-issued, centralized currencies, Bitcoin could
could provide an alternative method of storing value in continue to grow in popularity for years to come.

approximately 115 large state-owned conglomerates. The returns for these businesses,
ranging from telecommunications to energy, have been far lower than those from related
private enterprises. Despite these small reforms, some still express doubt that the Com-
munist Party will allow a true market-based economy to take hold. The state still controls
80,000 small-scale businesses across the country, plans to maintain a high level of con-
trol over the nationalized conglomerates, and continues to exert a level of control over
the stock market.36,37
Poland, transitioning from a state-planned economy to a free-market economy,
underwent extensive privatization of its state-owned enterprises in the early 2000s. The
mass privatization of industries, including insurance and coal mining, boosted the Warsaw
Stock Exchange into the top ten European markets by value.38 Turkey had issued various
privatization tenders in the energy and electricity sectors; Nigeria finalized the privatiza-
tion of three of the Power Holding Company of Nigeria successor companies in 2012;
59
60 Part 1 Environmental Foundation

and Pakistan had privatized 167 state-owned enterprises since its inception, yielding
US$9 billion in proceeds to the government.39 As described in the International Manage-
ment in Action box “Brazilian Economic Reform” in Chapter 1, many developing coun-
tries are privatizing their state-owned companies to provide greater competition and access
to service.

Regulation of Trade and Investment

The regulation of international trade and investment is another area in which individual
countries use their legal and regulatory policies to affect the international management
environment. The rapid increase in trade and investment has raised concerns among
countries that others are not engaging in fair trade, based on the fundamental principles
of international trade as specified in the WTO and other trade and investment agreements.
Specifically, international trade rules require countries to provide “national treatment,”
which means that they will not discriminate against others in their trade relations. Unfor-
tunately, many countries engage in government support (subsidies) and other types of
practices that distort trade. For example, many developing countries require that foreign
MNCs take on local partners in order to do business. Others mandate that MNCs employ
a certain percentage of local workers or produce a specific amount in their country. These
practices are not limited to developing countries. Japan, the United States, and many
European countries use product standards, “buy local” regulations, and other policies to
protect domestic industries and restrict trade.
In addition, most trade agreements require that countries extend most-favored-nation
status such that trade benefits accorded one country (such as tariff reductions under the
WTO) are accorded all other countries that are parties to that agreement. The emergence
of regional trade arrangements has called into question this commitment because, by
definition, agreements among a few countries (NAFTA, EU) give preference to those
specific members over those who are not part of these trading “blocs.” As discussed in
Chapter 1, many countries engage in antidumping actions intended to offset the practice
of trading partners “dumping” products at below cost or home market price, as well as
countervailing duty actions intended to offset foreign government subsidization. In each
case, there is evidence that many countries abuse these laws to protect domestic industries,
something the WTO has been more vigilant in monitoring in recent years.

■ Technological Environment and Global Shifts

in Production
Technological advancements not only connect the world at incredible speed but also aid in
the increased quality of products, information gathering, and R&D. Manufacturing, infor-
mation processing, and transportation are just a few examples of where technology improves
organizational and personal business. The need for instant communication increases
exponentially as global markets expand. MNCs need to keep their businesses connected;
this is becoming increasingly easier as technology contributes to “flattening the world.”
Thomas Friedman, in his book The World Is Flat, writes that such events as the introduc-
tion of the Internet or the World Wide Web, along with mobile technologies, open sourc-
ing, and work flow software distribution, not only enable businesses and individuals to
access vast amounts of information at their fingertips in real time but are also resulting
in the world flattening into a more level playing field.40

Trends in Technology, Communication, and Innovation

The innovation of the microprocessor could be considered the foundation of much of the
technological and computing advancements seen today.41 The creation of a digital frame-
work allowed high-power computer performance at low cost. This then gave birth to such
breakthroughs as the development of enhanced telecommunication systems, which will
Chapter 2 The Political, Legal, and Technological Environment 61

be explored in greater depth later in the chapter. Now, computers, telephones, televisions,
and wireless forms of communication have merged to create multimedia products and
allow users anywhere in the world to communicate with one another. The Internet allows
one to obtain information from literally billions of sources.
Global connections do not necessarily level the playing field, however. Throughout
the early 2000s, the challenge of integrating telecom standards became an issue for
MNCs in China. Qualcomm Corporation had wanted to sell China narrowband CDMA
(code division multiple access) technology; however, Qualcomm was initially unsuccess-
ful in convincing the government that it could build enough products locally. Instead,
China’s network, the world’s largest mobile network, used primarily the GSM technology
that is popular in Europe.42 Following the reorganization of China’s telecommunication
industry in 2009, however, CDMA gained a foothold in China. In 2015 alone, China
Telecom was expected to sell an estimated 100 million CDMA handsets.43
Furthermore, concepts like the open-source model allow for free and legal sharing
of software and code, which may be utilized by underdeveloped countries in an attempt
to gain competitive advantage while minimizing costs. India exemplifies this practice as
it continues to increase its adoption of the Linux operating system (OS) in place of the
global standard Microsoft Windows. The state of Kerala shifted the software of its 2,600
high schools to the Linux system, enabling each user to configure it to his or her needs,
with the goal of creating a new generation of adept programmers. Microsoft, through its
DreamSpark program, has been providing students access to its latest developer and
designer tools at no charge. The program aims to unlock students’ creative potential and
set them on the path to academic and career success and, since its inception, has provided
nearly 50 million free downloads. Originally launched in the United States and United
Kingdom, the DreamSpark program is now available to students in over 165 countries.44
More broadly, a number of for-profit and nonprofit firms have been aggressively working
to bring low-cost computers into the hands of the hundreds of millions of children in the
developing world who have not benefited from the information and computing revolution.
Next Thing Company, a start-up based in California, has developed an extremely
low-cost computer with the goal of providing word processing and Internet access to
people in low-income areas. Called C.H.I.P., the computers retail for US$9. The comput-
ers are roughly the size of a postcard, allowing for cheap and easy shipment to any part
of the world. Despite the low price, C.H.I.P. computers have about as much functional-
ity as a smartphone; every unit has Wi-Fi capability, a 4-gigabyte hard drive, and 512
megabytes of RAM. Accessories can be connected through USB ports, and most televi-
sions can serve as the computer’s screen, saving additional costs by negating the need
for more expensive monitors. Because of the low cost and small size, the computers are
suited to be adapted, or “hacked,” to best fit the needs of the user. Next Thing Company
plans to actively partner with schools and nonprofits to ensure that the computers ulti-
mately meet the needs of the end users in the developing world. The first 30,000 units
were shipped in January 2016.45
There also exists a great potential for disruptions as the world relies more and more
on digital communication and imaging. The world is connected by a vast network of
fiber-optic cables that we do not see because they are buried either underground or under-
water. Roughly the width of a garden hose, 200 sets of these cables carry 99 percent of
all transoceanic communication, leading to a great deal of system vulnerability.46 In 2015,
a series of accidental disruptions to one cable led to weeks of slower Internet and com-
munication problems throughout Vietnam. The fact that so many were reliant on a mere
4-inch-thick cable shows the potential risks associated with greater global connectivity.47
We have reviewed general influences of technology here, but what are some of the
specific dimensions of technology and what other ways does technology affect interna-
tional management? Here, we explore some of the dimensions of the technological envi-
ronment currently facing international management, with a closer look at biotechnology,
e-business, telecommunications, and the connection between technology, outsourcing,
and offshoring.
62 Part 1 Environmental Foundation

In addition to the trends discussed above, other specific ways in which technology
will affect international management in the next decade include
1. Rapid advances in biotechnology that are built on the precise manipulation of
organisms, which will revolutionize the fields of agriculture, medicine, and
industry.
2. The emergence of nanotechnology, in which nanomachines will possess the
ability to remake the whole physical universe.
3. Satellites that will play a role in learning. For example, communication firms
will place tiny satellites into low orbit, making it possible for millions of peo-
ple, even in remote or sparsely populated regions such as Siberia, the Chinese
desert, and the African interior, to send and receive voice, data, and digitized
images through handheld telephones.
4. Automatic translation telephones, which will allow people to communicate
naturally in their own language with anyone in the world who has access to a
telephone.
5. Artificial intelligence and embedded learning technology, which will allow think-
ing that formerly was felt to be only the domain of humans to occur in machines.
6. Silicon chips containing up to 100 million transistors, allowing computing
power that now rests only in the hands of supercomputer users to be available
on every desktop.
7. Supercomputers that are capable of 1 trillion calculations per second, which
will allow advances such as simulations of the human body for testing new
drugs and computers that respond easily to spoken commands.48
The development and subsequent use of these technologies have greatly benefited
the most developed countries in which they were first deployed. However, the most positive
effects should be seen in developing countries where inefficiencies in labor and production
impede growth. Although all these technological innovations will affect international man-
agement, specific technologies will have especially pronounced effects in transforming
economies and business practices. The following discussion highlights some specific
dimensions of the technological environment currently facing international management.

Biotechnology
The digital age has given rise to such innovations as computers, cellular phones, and
wireless technology. Advancements within this realm allow for more efficient commu-
nication and productivity to the point where the digital world has extended its effect from
information systems to biology. Biotechnology is the integration of science and technol-
ogy, but more specifically it is the creation of agricultural or medical products through
industrial use and manipulation of living organisms. At first glance, it appears that the
fusion of these two disciplines could breed a modern bionic man immune to disease,
especially with movements toward technologically advanced prosthetics, cell regeneration
through stem cell research, or laboratory-engineered drugs to help prevent or cure diseases
such as HIV or cancer.
Pharmaceutical competition is also prevalent on the global scale with China’s raw
material reserve and the emergence of biotech companies such as Genentech and Merck,
after its acquisition of Swiss biotech company Serono. India is emerging as a major
player, with its largest, mostly generic, pharmaceutical company Ranbaxy’s ability to
produce effective and affordable drugs (for further discussion on drug affordability inter-
nationally and the ethics of drug pricing, see In-Depth Integrative Case 1.2 at the end
of Part One).49 While pharmaceutical companies mainly manufacture drugs through a
process similar to that of organic chemistry, biotech companies attempt to discover
genetic abnormalities or medicinal solutions through exploring organisms at the molecu-
lar level or by formulating compounds from inorganic materials that mirror organic
Chapter 2 The Political, Legal, and Technological Environment 63

substances. DNA manipulation in the laboratory extends beyond human research. As

mentioned above, another aspect of biotech research is geared toward agriculture. In the
United States and Brazil, ethanol production is expected to increase for the foreseeable
future, with corn and sugarcane serving as feedstock. Automobile gasoline in Brazil is
now mandated to consist of nearly 25 percent ethanol, and blended gasoline was initially
encouraged in the United States through tax subsidies.50 However, some have raised
concerns regarding increased food prices caused by using sugarcane and corn as a fuel
alternatives. For this and many other reasons, global companies like Monsanto are col-
laborating with others such as BASF AG to work toward creating genetically modified
seeds such as drought-tolerant corn and herbicide-tolerant soybeans.51 (See the supple-
mental online simulation related to the U.S.-EU dispute over trade in genetically modified
organisms.) Advancements in this industry include nutritionally advanced crops that may
help alleviate world hunger.52
Aside from crops, the meat industry can also benefit from this process. The out-
break of mad cow disease in Great Britain sparked concern when evidence of the disease
spread throughout Western Europe; however, the collaborative work of researchers in
the United States and Japan may have engineered a solution to the problem by eliminat-
ing the gene that is the predecessor to making the animal susceptible to this ailment.53
Furthermore, animal cloning, which simply makes a copy of preexisting DNA, could
boost food production by producing more meat or dairy-producing animals. The first
evidence of a successful animal clone was Dolly, born in Scotland in 1996. Complica-
tions arose, and Dolly aged at an accelerated rate, indicating that while she provided
hope, there still existed many flaws in the process. While the EU has banned the clon-
ing of livestock, the United States allows cloned animal products to be incorporated in
the food supply.54 Other countries actively cloning animals include Australia, China,
Japan, New Zealand, and South Korea. The world is certainly changing, and the trend
toward technological integration is far from over. Whether one desires laser surgery to
correct eyesight, a vaccine for emerging viruses, or more nutritious food, there is a
biotechnology firm competing to be the first to achieve these goals. Hunger and poor
health care are worldwide issues, and advancement in global biotechnology is working
to raise the standards.

E-Business
As the Internet becomes increasingly widespread, it is having a dramatic effect on inter-
national commerce. Table 2–2 shows Internet penetration rates for major world regions,

Table 2–2
World Internet Usage and Population Statistics
Internet Internet
World Population Users Users Penetration Growth Users %
Regions (2015 Est.) 2000 2015 (% Population) 2000–2015 of Total
Africa 1,158,355,663 4,514,400 327,145,889 28.2% 7,146.7% 9.8%
Asia 4,032,466,882 114,304,000 1,611,048,215 40.0 1,309.4 48.1
Europe 821,555,904 105,096,093 604,147,280 73.5 474.9 18.1
Middle East 236,137,235 3,284,800 123,172,132 52.2 3,649.8 3.7
North America 357,178,284 108,096,800 313,867,363 87.9 190.4 9.4
Latin America/
Caribbean 617,049,712 18,068,919 339,251,363 55.5 1,777.5 10.1
Oceania/Australia 37,158,563 7,620,480 27,200,530 73.2 256.9 0.8
WORLD TOTAL 7,259,902,243 360,985,492 3,345,832,772 46.1 826.9 100.0

Source: “Usage and Population Statistice,” Internet World Stats, www.internetworldstats.com/stats.htm. Estimated Internet users are 3,345,832,772 for
November 15, 2015.
64 Part 1 Environmental Foundation

illustrating the dramatic increase from 2000 to 2015 and the accompanying growth rates,
with Africa exhibiting the highest rate at more than 7,000 percent.
Tens of millions of people around the world have now purchased books from Ama-
zon.com, and the company has now expanded its operations around the world (see The
World of International Management at the beginning of Chapter 11). So have a host of
other electronic retailers (e-tailers), which are discovering that their home-grown retailing
expertise can be easily transferred and adapted for the international market.55 Dell Com-
puter has been offering B2C (electronic business-to-consumer) goods and services in
Europe for a number of years, and the automakers are now beginning to move in this
direction. Tesla sells most of its cars directly to customers through the Internet, and
Toyota is testing a similar model.56 Other firms are looking to use e-business to improve
their current operations. For example, Deutsche Bank has overhauled its entire retail net-
work with the goal of winning affluent customers across the continent.57 Yet the most
popular form of e-business is for business-to-business (B2B) dealings, such as placing
orders and interacting with suppliers worldwide. Business-to-consumer (B2C) transactions
will not be as large, but this is an area where many MNCs are trying to improve their
operations.
The area of e-business that will most affect global customers is e-retailing and
financial services. For example, customers can now use their keyboard to pay by credit
card, although security remains a problem. However, the day is fast approaching when
electronic cash (e-cash) will become common. This scenario already occurs in a number
of forms. A good example is prepaid smart cards, which are being used mostly for tele-
phone calls and public transportation. An individual can purchase one of these cards and
use it in lieu of cash. This idea is blending with the Internet, allowing individuals to buy
and sell merchandise and transfer funds electronically. The result will be global digital
cash, which will take advantage of existing worldwide markets that allow buying and
selling on a 24-hour basis.
Some companies, such as Capital One 360, the U.S.’s largest direct bank, are
completely “disintermediating” banking by eliminating the branches and other “bricks-
and-mortar” facilities altogether. Through Capital One 360, all banking transactions occur
online, with higher interest rates often offered to those who agree to “paperless” state-
ments and communication. To align with its Internet-savvy clientele, Capital One 360
has developed a comprehensive social media “Savers Community,” including Twitter,
Facebook, Pinterest, and its YouTube “Challenge Your Savings” video series. And so
far, not one of the 275-plus bank failures in the U.S., since the financial crisis began in
2008, has been online banks.58 HSBC and other global banks are learning from Capital
One 360’s success and growing their Internet banking globally(see In-Depth Integrative
Case 4.1 after Part Four).

Telecommunications
One of the most important dimensions of the technological environment facing interna-
tional management today is telecommunications. To begin with, global access to afford-
able cell phone services is resulting in a form of technological leapfrogging, in which
regions of the world are moving from a situation where phones were completely unavail-
able to one where cell phones are available everywhere, including rural areas, due to the
quick and relatively inexpensive installation of cellular infrastructure. This is especially
true in sub-Saharan Africa. According to a 2015 Pew Research study, the number of
land-line phone users is nearly zero percent in the countries of Ghana, Kenya, Nigeria,
Senegal, South Africa, Tanzania, and Uganda, while cellular phone access in those same
countries averages over 80 percent.59 In addition, technology has merged two previously
discrete methods of communication: the telephone and the Internet. Internet access
through cellular phones has, in many ways, replaced access via computers. By 2016,
nearly half of all e-mails were opened on mobile phones. Social networking sites have
seen an even larger shift to mobile; over 900 million people were checking Facebook
Chapter 2 The Political, Legal, and Technological Environment 65

daily via their smartphones, and 90 percent of all video views on Twitter were occurring
on mobile devices.60 Wireless technology is proving to be a boon for less developed
countries, such as in South America, Africa, and Eastern Europe where customers once
waited years to get a telephone installed.
One reason for this rapid increase in telecommunications services is many countries
believe that without an efficient communications system, their economic growth may
stall. Additionally, governments are accepting the belief that the only way to attract
foreign investment and know-how in telecommunications is to cede control to private
industry. As a result, while most telecommunications operations in the Asia-Pacific
region were state-run a few decades ago, a growing number are now in private hands.
Singapore Telecommunications, Pakistan Telecom, Thailand’s Telecom Asia, Korea Tele-
com, and Globe Telecom in the Philippines all have been privatized, and MNCs have
helped in this process by providing investment funds. Today, First Pacific holds a 25 per-
cent stake in the Philippine Long Distance Telephone Company, and the Japanese gov-
ernment has privatized nearly two-thirds of Nippon Telegraph & Telephone (NTT). At
the same time, Australia’s Telestra is moving into the Philippines; Thailand is loosening
regulations on foreign investment in telecom; and Korea Telecom has operations in
Brunei, Mongolia, and Uzbekistan.
Many governments are reluctant to allow so much private and foreign ownership of
such a vital industry; however, they also are aware that foreign investors will go elsewhere
if the deal is not satisfactory. The Hong Kong office of Salomon Brothers, a U.S. invest-
ment bank, estimates that to meet the expanding demand for telecommunication service
in Asia, companies will need to considerably increase the investment, most of which will
have to come from overseas. MNCs are unwilling to put up this much money unless they
are assured of operating control and a sufficiently high return on their investment.
Developing countries are eager to attract telecommunication firms and offer liberal
terms. This liberalization has resulted in rapid increases in wireless penetration, with more
than 1.2 billion wireless devices in circulation in China and about a billion in India.
Between 2000 and 2012, the total number of mobile subscribers in developing countries
grew dramatically—from 250 million to nearly 4.5 billion.61 According to the International
Telecommunications Union, nearly 80 percent of people in developing nations have mobile
phones.62 Growth was rapid in all regions, but fastest in sub-Saharan Africa. It is estimated
that mobile phone penetration in Africa stands at over 60 percent, and, in Nigeria alone,
there are nearly 150 million mobile phones. This represents a nearly one-to-one ratio of
people to mobile devices.63 In Africa, mobile users are increasingly relying on their
devices for commerce and payment. Transactions are conducted via text message, and
users aren’t even required to hold a bank account.64 Apple and Samsung, two of the larg-
est mobile phone producers globally, have been aggressively penetrating emerging markets
with smartphone technology (see The World of International Management at the beginning
of Chapter 5). Since 2012, China has held the largest share of smartphone sales world-
wide.65 Although the counterfeiting of smartphones remains an issue in many emerging
markets, there are signs that some effort is being taken to protect authentic products; in
2015, police in Beijing busted a large-scale counterfeiting operation that included hun-
dreds of employees and six production lines. According to the Wall Street Journal, this
particular counterfeiter manufactured over 40,000 fake iPhones in 2015 alone.66

Technological Advancements, Outsourcing, and Offshoring

As MNCs use advanced technology to help them communicate, produce, and deliver their
goods and services internationally, they face a new challenge: how technology will affect
the nature and number of their employees. Some informed observers note that technology
already has eliminated much and in the future will eliminate even more of the work being
done by middle management and white-collar staff. Mounting cost pressures resulting
from increased globalization of competition and profit expectations exerted by investors
have placed pressure on MNCs to outsource or offshore production to take advantage of
66 Part 1 Environmental Foundation

lower labor and other costs.67 In the past century, machines replaced millions of manual
laborers, but those who worked with their minds were able to thrive and survive. During
the past three decades in particular, employees in blue-collar, smokestack industries such
as steel and autos have been downsized by technology, and the result has been a perma-
nent restructuring of the number of employees needed to run factories efficiently. In the
1990s, a similar trend unfolded in the white-collar service industries (insurance, banks,
and even government). Most recently, this trend has affected high-tech companies in the
late 1990s and early 2000s, when after the dot-com bubble burst, hundreds of thousands
of jobs were lost, and again in 2008–2010, when many jobs were lost in finance and
related industries as a result of the financial crisis and global recession. Furthermore, the
job recovery in the wake of the financial crisis has been largely dependent on lower-wage
jobs. According to the National Employment Law Project, 78 percent of jobs lost during
the global recession were in finance, manufacturing, and construction, but only 57 percent
of the jobs created from 2009 to 2015 were in those fields.68
Some experts predict that in the future, technology has the potential to displace
employees in all industries, from those doing low-skilled jobs to those holding positions
traditionally associated with knowledge work. For example, voice recognition is helping
to replace telephone operators; the demand for postal workers has been reduced substan-
tially by address-reading devices; and cash-dispensing machines can do 10 times more
transactions in a day than bank tellers, so tellers can be reduced in number or even
eliminated entirely in the future. Also, expert (sometimes called “smart”) systems can
eliminate human thinking completely. For example, American Express has an expert
system that performs the credit analysis formerly done by college-graduate financial
analysts. In the medical field, expert systems can diagnose some illnesses as well as
doctors can, and robots capable of performing certain operations are starting to be used.
Emerging information technology also makes work more portable. As a result,
MNCs have been able to move certain production activities overseas to capitalize on
cheap labor resources. This is especially true for work that can be easily contracted with
overseas locations. For example, low-paid workers in India and Asian countries now are
being given subcontracted work such as labor-intensive software development and code-
writing jobs. A restructuring of the nature of work and of employment is a result of such
information technology; Table 2–3 identifies some winners and losers in the workforce
in recent years.
The new technological environment has both positives and negatives for MNCs and
societies as a whole. On the positive side, the cost of doing business worldwide should
decline thanks to the opportunities that technology offers in substituting lower-cost
machines for higher-priced labor. Over time, productivity should go up, and prices should
go down. On the negative side, many employees will find either their jobs eliminated or
their wages and salaries reduced because they have been replaced by machines and their
skills are no longer in high demand. This job loss from technology can be especially
devastating in developing countries. However, it doesn’t have to be this way. A case in
point is South Africa’s showcase for automotive productivity as represented by the Delta
Motor Corporation’s Opel Corsa plant in Port Elizabeth. To provide as many jobs as pos-
sible, this world-class operation automated only 23 percent, compared to more than
85 percent auto assembly in Europe and North America.69 Even some manufacturing
processes in developed countries have traded robots for humans; in 2014, Toyota replaced
automated manufacturing machines with manual jobs in an effort to increase quality.70
Some industries can also add jobs. For example, the positive has outweighed the negative
in the computer and information technology industry, despite its ups and downs. Specifi-
cally, employment in the U.S. computer software industry has increased over the last
decade. In less developed countries such as India, a high-tech boom in recent years has
created jobs and opportunities for a growing number of people.71 Even though developed
countries such as Japan and the United States are most affected by technological displace-
ment of workers, both nations still lead the world in creating new jobs and shifting their
traditional industrial structure toward a high-tech, knowledge-based economy.
Chapter 2 The Political, Legal, and Technological Environment 67

Table 2–3
Winners and Losers in Selected Occupations: Percentage Change Forecasts for 2014–2024
The 10 occupations with the largest projected employment growth 2014–2024

Employment
in millions
Percent
Occupation 2014 2024 Difference change
Personal care aides 1768.4 2226.5 458.1 25.9%
Registered nurses 2751.0 3190.3 439.3 16.0
Home health aides 931.5 1261.9 348.4 38.1
Combined food preparation and serving workers,
including fast food 3159.7 3503.2 343.5 10.9
Retail salespersons 4624.9 4939.1 314.2 6.8
Nursing assistants 1492.1 1754.1 262.0 17.6
Customer service representatives 2581.8 2834.8 252.9 9.8
Cooks, restaurant 1109.7 1268.7 158.9 14.3
General and operations managers 2124.1 2275.2 151.1 7.1
Construction laborers 1159.1 1306.5 147.4 12.7
The 10 occupations with the largest projected employment declines, 2014–2024

Employment
in millions
Percent
Occupation 2014 2024 Difference change
Bookkeeping, accounting, and auditing clerks 1760.3 1611.5 −148.7 −8.4%
Cooks, fast food 524.4 444.0 −80.4 −15.3
Postal service mail carriers 297.4 219.4 −78.1 −26.2
Executive secretaries and executive administrative
assistants 776.6 732.0 −44.6 −5.7
Farmworkers and laborers, crop, nursery, and
greenhouse 470.2 427.3 −42.9 −9.1
Sewing machine operators 153.9 112.2 −41.7 −27.1
Tellers 520.5 480.5 −40.0 −7.7
Postal service mail sorters, processors, and
processing machine operators 117.6 78.0 −39.7 −33.7
Cutting, punching, and press machine setters,
operators, and tenders, metal and plastic 192.2 152.7 −39.5 −20.6
Switchboard operators, including answering service 112.4 75.4 −37.0 −32.9

Source: Bureau of Labor Statistics, “Tables 4 & 6,” Employment Projections. December 15, 2015. http://www.bls.gov/emp/tables.htm.

The precise impact that the advanced technological environment will have on inter-
national management over the next decade is difficult to forecast. One thing is certain,
however; there is no turning back the technological clock. MNCs and nations alike must
evaluate the impact of these changes carefully and realize that their economic perfor-
mance is closely tied to keeping up with, or ahead of, rapidly advancing technology.

The World of International Management—Revisited

Political, legal, and technological environments can alter the landscape for global com-
panies. The chapter opening The World of International Management described how
social media can be used a tool for political change—both positive and negative. It has
68 Part 1 Environmental Foundation

allowed political groups to organize, journalists to communicate and report on political

developments, and citizens to mobilize and build support for political movements. This
situation underscores the increasing uncertainty in the global business environment and
the rapidity and extent of political and legal change. It also highlights how technology
is contributing to accelerating change and how traditional legal systems have difficulty
keeping pace with these changes. International managers need to be aware of how dif-
fering political, legal, and technological environments are affecting their business and
how globalization, security concerns, and other developments influence these environ-
ments. Changes in political, legal, and environmental conditions also open up new busi-
ness opportunities but close some old ones.
In light of the information you have learned from reading this chapter, you should
have a good understanding of these environments and some of the ways in which they
will affect companies doing business abroad. Drawing on this knowledge, answer the
following questions: (1) How will changes in the political and legal environment in the
Middle East and North Africa, including the potential economic impacts of terrorism,
affect U.S. MNCs conducting business there? (2) How might evolving political interests
and legal systems affect future investment in the region? (3) How does technology result
in greater integration and dependencies among economies, political systems, and financial
markets, but also greater fragility?

SUMMARY OF KEY POINTS

1. The global political environment can be understood must obey the rules set down by the Foreign Cor-
via an appreciation of ideologies and political sys- rupt Practices Act. Privatization and regulation of
tems. Ideologies, including individualism and col- trade also affect the legal and regulatory environ-
lectivism, reflect underlying tendencies in society. ment in specific countries.
Political systems, including democracy and totali- 3. The technological environment is changing quickly
tarianism, incorporate ideologies into political struc- and is having a major impact on international busi-
tures. There are fewer and fewer purely collectivist ness. This will continue in the future with, for
or socialist societies, although totalitarianism still example, digitization, higher-speed telecommunica-
exists in several countries and regions. Many coun- tion, and advancements in biotechnology as they
tries are experiencing transitions from more social- offer developing countries new opportunities to
ist to democratic systems, reflecting related trends leapfrog into the 21st century. New markets are
discussed in Chapter 1 toward more market-oriented being created for high-tech MNCs that are eager to
economic systems. provide telecommunications service. Technological
2. The current legal and regulatory environment is developments also impact both the nature and the
both complex and confusing. There are many differ- structure of employment, shifting the industrial
ent laws and regulations to which MNCs doing structure toward a more high-tech, knowledge-based
business internationally must conform, and each economy. MNCs that understand and take advantage
nation is unique. Also, MNCs must abide by the of this high-tech environment should prosper, but
laws of their own country. For example, U.S. MNCs they also must keep up, or go ahead, to survive.

KEY TERMS

act of state doctrine, 54 Foreign Corrupt Practices Act protective principle, 53

civil or code law, 53 (FCPA), 55 socialism, 48
collectivism, 48 individualism, 47 socialist law, 53
common law, 53 Islamic law, 53 territoriality principle, 53
democracy, 50 nationality principle, 53 totalitarianism, 50
doctrine of comity, 54 principle of sovereignty, 53
Chapter 2 The Political, Legal, and Technological Environment 69

REVIEW AND DISCUSSION QUESTIONS

1. In what ways do different ideologies and political 3. How will advances in technology and telecommuni-
systems influence the environment in which MNCs cations affect developing countries? Give some
operate? Would these challenges be less for those specific examples.
operating in the EU than for those in Russia or 4. Why are developing countries interested in privatiz-
China? Why or why not? ing their state-owned industries? What opportunities
2. How do the following legal principles impact MNC does privatization have for MNCs?
operations: the principle of sovereignty, the national-
ity principle, the territoriality principle, the protective
principle, and principle of comity?

INTERNET EXERCISE: HITACHI GOES WORLDWIDE

Hitachi products are well known in the United States, as North America. Finally, read about its European opera-
well as in Europe and Asia. However, in an effort to tions. Then answer these three questions: (1) What
maintain its international momentum, the Japanese kinds of products and systems does the firm offer?
MNC is continuing to push forward into new markets, What are its primary areas of emphasis? (2) In what
especially emerging markets, while also developing new types of environments does it operate? Is Hitachi pri-
products. Visit the MNC at its website www.hitachi.com marily interested in developed markets, or is it also
and examine some of the latest developments that are pushing into newly emerging markets? (3) Based on
taking place. Begin by reviewing the firm’s current what it has been doing over the last two to three years,
activities in Asia, specifically Hong Kong and what do you think Hitachi’s future strategy will be in
Singapore. Then look at how it is doing business in competing in the environment of international business?

ENDNOTES

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Internet Freedom Debate Heats Up,” Broadband- www.huffingtonpost.com/huff-wires/20131019/
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70 Part 1 Environmental Foundation

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72 Part 1 Environmental Foundation

71. Ashok Bhattacharjee, “India’s Outsourcing Tigers 75. CIA, “Greece.”

Seek Cover, Markets, in Europe’s East,” The Wall 76. Liz Alderman, James Kanter, Jim Yardley, and Jack
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 In the International
Greece Spotlight

Greece is located in southern Europe, positioned geograph- The country has started to show some limited signs of
ically between the Aegean and Mediterranean Seas, Albania, progress and has recently agreed to further economic
and Turkey. The country’s land mass is slightly smaller than reforms in return for liquidity from its lenders. Greece is
that of Alabama. Major natural resources include lignite, not out of the woods, however. The bailout money has
petroleum, iron ore, bauxite, lead, zinc, nickel, magnesite, largely gone to the country’s lenders and has not yet been
marble, salt, and hydro-power potential.72 able to support the restructuring of the economy.76
Greece has a population of 10.78 million people, with
Athens, the capital, home to 3 million people. Population You Be the International Management
growth has stabilized at zero in recent years. Greece is a Consultant
fairly homogeneous country, with close to 95 percent of
the population with Greek ethnicity. Nearly all in the In 2015, Greece received its third bailout in five years.
country practice the Greek Orthodox religion. With a Relations between Greece and its creditors remain strained
median age of 44 years, Greece has an older population and contentious. On several occasions, Greece has threat-
than most countries in the world. Approximately 34 per- ened to default on its loans and has even contemplated
cent of the population is 55 years or older. In recent years, exiting the European Union. The 2015 bailout allowed
the country has struggled economically, leading to the creditors to demand harsh austerity programs and require
third highest unemployment rate in the world.73 deep economic and structural reforms. These measures
Greece’s GDP is estimated at US$238 billion. After included raising the retirement age, cutting pensions, lib-
years of negative growth, and declines of 9.1 percent in eralizing the energy market, opening up protected profes-
2011 and 7.3 percent in 2012, the country’s GDP finally sions, enlarging a property tax that Greeks already despise,
grew in 2014 by 0.7 percent. GDP per capita in Greece and moving ahead with a program to sell state-owned
is estimated at $26,000. Greece has a capitalist economy, enterprises and other assets.77
but the public sector accounts for approximately 40 per-
cent of GDP.74 Questions
Greece was significantly impacted by the financial cri- 1. If you are a consultant for a business looking to
sis of 2008. Greece’s poor financial management of the expand in Europe, is Greece even an option?
country’s budget and its failure to report massive deficits 2. Do the facts that its population is comprised largely
in a timely fashion to its borrowers amplified the impact of government workers, that the citizens were
of the crisis, causing the economy to spiral downward. As largely in favor of defaulting on its national debt,
a consequence, Greece was no longer able to borrow in and that the country nearly left the European Union
global markets. Ultimately, Greece was required to take a constitute a deal breaker?
US$316 billion bailout from the European Union. In 3. If the government does, in fact, implement the
return for the bailout, the Greek government was required agreed-upon austerity measures, would that be a
to implement dramatic spending cuts and tax increases to sign that the country is on the right track?
reduce its budget deficits. In total, aid from the European 4. What other concerns would you have about entering
Union has amounted to approximately 3 percent of the the Greek market?
country’s GDP.75

73