Political-Legal Environment

LH 9
College of Applied Business

1 Political-Legal Environment
Background
 A hospitable and stable government can encourage business
investment and growth in spite of the scarcity in natural
resources and other resources.
 Firms have to cope with the large number of tensions like
ideological conflicts, terrorism, labor activism and so on.
 Political Firms pose lot of risk to the firms so that the risk
assessment and analysis of such risk are very important so as to
draw out the opportunities and threats.
 Political Environment is the state government and its institutions
and legislations and the public and private stakeholders who
operate and interact with or influence that system.
 Then what is politics? Find it !!!

2 Political-Legal Environment
Introduction
 A political system is concerned with the
I. The direction and administration of the state.
II. The government
III. The regulations of the social relationships
 State: an organized community living under a single political
structure and government or a specific territory.
Features:
1. Population:
Every state should have certain population to live in. They can
either be the residents or non-residents (foreigners).
2. Government:
A body which maintains law and order, provides public services
and enforces decision that its people must obey.

3 Political-Legal Environment
Introduction
 Features of the state. (Continued)
3. Boundary:
A state should have a definite boundary.
4. Sovereignty:
it is the independent authority of making rules and laws to govern the state.
Has complete authority in making and executing laws. External intervention
in such activities are not entertained.
 Government: A body which is concerned with making laws and
implementing laws, representing the state, routine public affairs
management.
 Making rules are basically done by the parliament where voted
representatives are present to make laws.
 Implementation of those laws are done by the executive headed by Prime
Minister and other concerned department ministers.
 Routine and public affairs management is done by the civil service
providers who work at civil service authorities and facilitate the public.
4 Political-Legal Environment
Introduction
 Social Relationships:
 It is the interpersonal relationships between two or more
persons in a society.
 These relationships are both integrated and regulated by the
state and its government for nation’s harmony, peace and well
being.

5 Political-Legal Environment
Impact of Political Environment in Business
 The nature of social values and philosophies of the political system a country
govern the decision making process and the allocation of resources at the
macro level.
 Changes in political system (due to changes in government) generates
some degree of instability and uncertainty. These in turn create both
opportunities and risks for businesses
 Lack of study and understanding of these events may increase political risks for
the business
 in Hong-Kong political change in 1997 worried many managers.
 Business firms can also exercise considerable influence on the political
and government machinery to draw the attention to fulfill their needs –
e.g. through special interest and pressure groups
 External (international) political influences also constitute the
environment in which the domestic government policies as well as
business activities are affected.

6 Political-Legal Environment
Political Ideologies: Democratic Vs.
Totalitarianism

7 Political-Legal Environment
Democratic Vs. Totalitarianism
 Democratic system involve wide participation by citizens in
the decision making.
 Representative democracy majority rule is achieved through periodic
elections.
 The ability of people to organize into political parties or other
competitive political groupings of their choice.
 The existence of safeguards on the fundamental rights of people.
 Under a totalitarian system, the government maintains control
over many aspects of life, all opposing political and cultural
expression is suppressed.
 Managers operating in a totalitarian state must make decisions based
on political rather than economic standards.

8 Political-Legal Environment
Totalitarianism: Types
 Fascism:
 A way of organizing a society in which the government is ruled by the
dictator who controls the lives of people and people are not allowed to
disagree with the government.
 E.g. Hitler is a Fascist.
 Communism:
 An economic system where all the means of production are owned in
common, rather by the individuals.
 E.g. North Korean government is a communist government.
 Theocratic:
 It is the political system where the government is ruled by a religious leader.
 E.g. Vatican City is ruled by the Christian pope.
 Secular:
 Control enforced through military power.

9 Political-Legal Environment
Political Parties of Nepal
 The political parties in Nepal has reached 164.
 Nepali Congress : 196 seats
 Communist Party of Nepal (Unified Marxist-Leninist)
 Communist Party of Nepal (Maoist)
 RPP , Nepal
 Madhesi Janadhikar forum Loktantrik
 Rastriya Prajatantra Party
 Tarai-Madhesh Loktantrik Party
 Sadbhavana Party
Nepali Congress
 The Nepali Congress has been in continuous operation since it
was founded as the Nepali National Congress in 1947.
 In the first democratic election of Nepal, Nepali Congress Party
secured an overwhelming majority to form the government.
 Following the royal coup by King Mahendra in 1960, many
leaders of party, including Prime Minister B.P. Koirala, and other
leaders were imprisoned.
 Although political parties were prohibited from 1960 to 1989
during the Panchayat system the Nepali Congress Party persisted.
 The party placed a basis for socioeconomic development.
 The party lead the three major pro democratic movement in 2007,
2046 and 2062/63 BS.
Nepali Congress
 It continued to be the only organized party for
democratization.
 In the 1980s referendum, it supported the multiparty
option in opposition to the panchayat system.
 In 1982 of B.P. Koirala died. He had consistently
advocated constitutional reforms and a broad-based policy
of national reconciliation.
 The party placed First—with 196 out of 575 elected seats
—in the November 2013 Constituent Assembly election.
Nepali Congress
 Social Democrat.
 Leader of the Nepal’s liberalization process after 1990.
 Liberal Economic Policy.
 Private Ownership of Assets.
 Wealth Maximization and equitable Distribution.
 Less Intervention by the government.
CPN (UML)
 The Communist Party of Nepal (Unified Marxist–
Leninist), also known as CPN-UML, CPN(UML), is
one of the largest communist parties in Nepal.
 It was created on January 6, 1991 through the unification
of the Communist Party of Nepal (Marxist) and the
Communist Party of Nepal (Marxist-Leninist).
 CPN (UML) was a product of the Jana Andolan (People's
Movement) uprising where communists, together with
the Nepali Congress played a major role in the
installment of a constitutional democracy in Nepal.
CPN Maoist (Unified)
 The Unified Communist Party of Nepal (Maoist) is a
Nepalese far-left political party, which holds to the Maoist
form of communism.
 It was founded in 1994 and is currently led by Pushpa
Kamal Dahal (commonly known as Prachanda).
 The CPN(M) was formed following a split in the
Communist Party of Nepal (Unity Centre). On February
13, 1996 the party launched the "Nepalese People's War"
and
 It gained control of most of the rural areas throughout
Nepal before Janandolan 2062/63.
CPN Maoist (Unified)
 The Maoists announced a ‘People's War’ on February 13,
1996.
 Maoists believe in the philosophy of Mao Zedong who
proclaimed, "Political power grows out of the barrel of a
gun.“
 Maoists are also inspired by ‘Revolutionary
Internationalist Movement’, Peru's left wing guerrilla
movement—the Sendero Luminoso (Shining Path), and
from radical communist parties in different parts of the
world.
Government and Constitutional Bodies
 Political system has three branches: Executive, legislature
and Judiciary.
 Legislature is responsible for policy making, law making.
Budget approving, executive control and representation of
public opinion.
 Council of ministers headed by the Prime minister is the
executive. They are responsible for the execution and
known as the cabinet- top policy making authority.
 New constitution has prescribed the size of the cabinet.

17 Political-Legal Environment
Government and Constitutional Bodies
 Bureaucracy is headed by the chief secretary followed by
the chief secretary, secretary, joint secretary, under secretary,
directors and headed by the section officers.
 Local government structure comprises of nagar palika and
gaun palika. There are altogether 217 municipalities in the
country.
 Judicial System provides the control and punishment
mechanisms to those who abide the law. Supreme Court,
High Court and District Court.
 Supreme court will be only one, High court will be at each
province or state and District court at every district
headquarters.
18 Political-Legal Environment
Government and Constitutional Bodies
 Special provision of Constitutional Council
(Sambaidhanik Aayog), Judicial Council (nyayik Aayog)
to appoint judges. Akhtiyar Durupayog tatha Anusandhan
Aayog (Commission for the investigation of the abuse of
the authority) and Human Rights Commission are two
other councils who checks for the corruption in civil
service and human rights protection respectively.

19 Political-Legal Environment
 Three pillars of state
Provisions made in the new constitution 2072
 Country

Constitution

President

Legislative Executive Judiciary

Prime-
Minister

Minister
A. Legislature

A deliberative body of persons, usually elective, who are

empowered to make, change, or repeal the laws of a country or
state; the institution of the country having the power to make
laws.

It is the policy making body of Nepal. Each and every bill

proposed by the executive has to be initiated, discussed,
reviewed, amended and voted upon in the legislature. So
ultimately it is the legislature that decides which bills should
be passed.
i) Major Assembly
 165 seats from direct election
 275 (Members of parliament)- Central Government
 110 seats proportionate representative
 Representation of women-30% of each party

ii. National Assembly

 59 seats
 8 representative from 7 states
 Also should consist of women and people form backward society
 Remaining seats will be represented by president

iii) Province
 7 province consists of 1 assembly
 550 members in total
 Each province should consist of 60% directly elected 40%
proportionate- Estimated 75 seats
B. Executive

President

Executive

Prime Minister

Home Minister Deputy Prime- Defense

Minister
Secretary Secretary

I.G.P Chief of Nepal

Army
A.E.G.P

D.I.G
 Prime Minister along with his council of
ministers is called the Temporary Executives.
They implement the policies framed by the
legislature. These executives are drawn from the
legislature.

Civil servants and other officers, staffs working

under the government of Nepal is called the
Permanent Executives. They are assigned the task
of policy implementation.
C. Judiciary

Judiciary is the adjudicating body. Nepalese

judiciary is an integrated and independent judiciary
meaning Supreme court is at the helm of the
judiciary and all other courts comes below the
Supreme court and the Judiciary is independent of
the executive and the legislature.

 Supreme Court- 1
 High Court- 7
 District Court- Each court in each district
 Judiciary

Direct Court

Appellate Court

Supreme Court

President
 What is Constitution?

 a system of fundamental principles according to

which a nation, state, corporation is governed.
 Types of Constitution in Nepal
 Written Constitution: is a formal document defining
the rules that govern the political system and the rights
of citizens and government in a codified form

 Conventional or Enacted Constitution: is the

constitution that is enacted by a constitution assembly

 Elastic Constitution: is the kind of constitution that can

be easily changed by an ordinary law making process.
 What does constitution do for the people and the
state?
 For the people, the constitution provides their social
protection wherein their right and privileges as citizens of
a particular country is stated.
 For the state, the constitution serves as the backbone of
the system of governance. Stated in the constitution is how
the state should take action to govern and protect its
citizens
Constitution of Nepal
2072 B.S/2015 A.D
 Nepal has succeeded to draft and promulgate the new
constitution through the Constituent Assembly.
 Writing constitution through the Constitution assembly
was a challenging task. But, the CA accomplished the
historic task after a constant effort lasting for eight
years.
 The constitution was endorsed by over 84% of the total
lawmakers.
 Out of 598 CA members, 507 voted in favor of the
constitution while 25 voted against and 66 others did not
take part in the election process.
Lawmakers raising their hand to support a
proposal at the CA meeting on Wednesday,
September 16, 2015
Highlights of Nepal
constitution 2072 2015
Features
7 States
 Federal State:
 no unitary structure. For time being
 7 federal states are proposed.
 Equitable State:
 governed with the principal of proportional inclusion and participation
 (inclusion of women and other minority group are to be included) in
each part.
 Multi-party democratic system:
 competitive multi-party democratic system
 rule by the people, rule to the people and rule with the people.
 People’s representatives who are elected will rule the nation.
 Secular:
 right to adopt the religion of their choice
 no one is forced or make other influence to change the religion.
 Executive Rights:
 vested on the council of minister which is headed by the Prime-Minister.
 Role of President:
 President is the ceremonial head of the state
 Provision of Amendment:
 provision of amendment in the constitution if 2/3rd majority of the parliament
vote for it.
 Role of Monarchy:
 The role of monarchy has come to an end.
 Flexible Constitution: it can easily be amended by the 2/3rd majority of the
parliament members.
 Nepal will be ruled by the constitutional presidency while prime minister is
the executive head. President will be now elected by the federal constituent
assembly members and central constitution members.
 Prime-Minister cannot dissolve Constituent Assembly. There should not be
any ‘Abiswas ko Prastab’ issued against the Prime-Minister for first two
years. This action is believed to make stable government.
 Nepal has adopted mixed election system. There will be three assemblies:
Major Assembly, National Assembly and Province Assembly.
 Supreme Court will be in Central State. There will be High Court in each
state while District Court will be in each district headquarters.
 Policies regarding finance, industry and
commerce (Section 51 (d))
1. Public sector, cooperative sector and private sector
2. Roles of Private sector
3. Cooperatives
4. Regulation
5. Fair distribution
6. Promoting industries and export
7. Control Mechanism
8. Protection
9. Prioritizing Domestic investment
10. Foreign Capital for infrastructure Development
11. Foreign aid
12. Non- resident Nepalese
13. Coordination among provinces
 Positive Impact of constitution on Business
Environment 39
1. Political Stability

Political-Legal Environment
 Prime Minister cannot dissolve CA while no “Abiswas ko Prastab’ can be
issued against the Prime Minister for the first two years.
2. Better Economic Conditions
I. Growth in GDP
II. Rise in Per capita income
III. Effective Income Distribution
IV. Poverty reduction
 Target to poor
 Social inclusion
 Funds and grants
 Community Development

V. Ensuring Fundamental Rights:

3. Increase in Employment Opportunities
Role of Government for business sector
 Facilitating Role
 Grant of facilities like finance, provision of essential public services,
arrangement of vital inputs.
 Provides subsidies to operate to those industries which are in problem.
 Provides administrative and economic infrastructure.
 Regulating Role
 Provides constitutional and legal framework for the conduct of the business.
 Limits operating and checks the undesirable formation of monopolies,
concentration of economic power in a few hands.
 Entrepreneurial Role
 Promotes the setting up of business enterprises like public enterprises.
 Facilitates private sector for conducting business by providing facilities in
investment.
Business-Government Relations
 Government should make favorable environment to undertake
business activities whereas business should follow rules, regulations
and pay taxes.
 Government and markets are complements rather than substitutes.
They alone neither can operate nor can sustain for longer period of
time.
 If markets/business are to work effectively there must be a well-
established and clearly defined property rights, effective competition,
fair trade practices which is ensured by the government.
 In Nepal, state itself owns varieties of companies as public
enterprises. Government should also consider itself in managing the
interest of special groups like labor force, consumer association and
others.

41 Political-Legal Environment
Some of the issues are as follows:
 Government Ownership of Business
 37 public enterprises operating in 2015. (7 Service industries
 7 industrial enterprises, 6 trade enterprises, 5 social sector enterprises,
3 public utility organizations, 9 financial institutions
 Employers’ Association
 Chamber of Commerce, 100 chambers in 75 districts.
 Manufacturing associations like brick, beverage and food association,
services associations like travel, trade association.
 They put collective bargaining efforts to make decisions favoring
their association.
 Labor as a Political Force:
 Trade Unions are affiliated to political parties.
 E.g. GEFONT (General Federation of Nepalese Trade Unions) near to CPN
UML
 Nepal Trade Union Congress (NTUC) near to Nepali Congress.

42 Political-Legal Environment
 Unions lobby against laws , if they do not match their
interest they create hurdles in the working environment.
 Political parties use such associations to demonstrate
against others.
 Their voice are often discussed at the legislative bodies
are they often influence the business environment.
 Unions are the vote banks for the political parties.

43 Political-Legal Environment
Business-Government Relations
Government
Relations with
Business

Promoter Regulator Caretaker

Rules Protection from

Public enterprises
Regulations competition
Infrastructure
Standards Security
Procurement
Procedures Assistance
Finance
Orders Patents/copyright

44 Political-Legal Environment
 Promoter Role of Government
• Public Enterprises: establish industries under state
ownership.
• Procurement: Government is large purchaser of goods
and services so they create new industries and increase
business volume.
• Incentives and subsidies: Provide incentive for
promotion of exports; Tax incentives for establishment of
industries in backward areas; subsidies for food and
fertilizer, transportation.
• Provision of Finance: government financial institutions
provide low cost financing to industries.

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 Regulator Role of Government
• Rules and regulations, standard procedures, and orders.
• It is used to exercise administrative control and
inspection over business.
• Business must comply with such regulations such as:
industrial policy, export and import policy, foreign
investment, protection of consumer rights, labor
relations, monetary and fiscal policy, environmental
protection, and so forth.

46
 Caretaker Role of Government
• Protection of domestic industries: in terms of tariff
protection
• Security: provides protection to business properties
• Assistance: implements packages programs to revive
and rehabilitate sick industries; and give assistance to
cottage and small industries.
• Patents and copyrights: government policies protects
the intellectual property rights of business.

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 Influence of Business on Government
• Business can also influence the government
a. Payment of taxes:
– Business organizations pay various taxes (tax on income,
wealth, consumption, services and movement of products) to
national and local governments, which constitute major part
of government revenue.
– Expansion of business activities in a country also contributes
to the government revenue, increases the employment.
b. Execution of government contract:
– Business organization bid for government contracts and
successfully complete them within the constraints of time,
cost and quality.
– Also helps the regular activities of the government in
executing contracts for supplier of goods and services
48
 Influence of Business on Government
c. Rendering of service
• Business organizations provide advice to government
through their associations that helps to formulate policies
and solve problems.
• Also participate in delegations to foreign countries to
promote trade and industry.
d. Others:
• Business donations are critical for running political parties.
Business participation in politics is a way of influencing the
politics to serve the interest of business
• Government needs support of business to attain its
objectives of employment, stability in price, economic growth.

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 Political Risk
Meaning of Political Risk
• Any changes in the political environment
• Risk of losing money due to changes that occur in a country’s government or
regulatory environment
• Arises from government actions such as new laws, imposition of high tax or
may arise due to non government actions such as vandalism, terrorism and so
on
• Can be analyzed from the country-specific perspective (macro approach) or
firm specific perspective (micro approach)
Three major types of political risk:
1) Ownership Risk – Risk on the property ownership and life
2) Operating Risk – Hinders or slow down the ongoing operation
3) Transfer Risk – Temporary or permanently block the shifting of fund between
the countries

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 Political Risk Factors
Political instability
 Probability that an irregular political event will occur
 Major reason for political instability is frequent change in
government
 The firms expected return fluctuates with an irregular political
event
 With political instability new opportunities and threats may be
created and the strategy which was designed earlier assuming
certain government policies may not work later
Traditional Hostilities and Terrorism
• Threat of industrial security and personal security, Nepal Bandh,
• Vehicle strike General strike, and other types of agitation.
• Kidnapping & killing are the weapons used by criminal gangs
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 Political Risk Factors
Labor conditions and Unions
• Labor availability, status of labor unions influences the business
• In Nepal, there are 1125 enterprise level, 32 association, 4
federations
• Labor unions are affiliated to political parties and thus their
demands, voices are considered.
Subjective Factors
Attitude towards private and foreign enterprises.
Other types of political risk
Expropriation: with compensation
Confiscation: without compensation
Weak Intellectual Property Rights (and protection):
Embargoes and sanctions
Boycotts

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 Political Risk Analysis
1) Assessing issues of relevance to the firm
• Identify the political issues which can influence business or
which can impose threat or opportunity to the business.
2) Assessing potential political factors/events
• Assess the potential political events.
• A new president or prime minister, a change in the country’s
ruling party, or an important piece of new legislation – these
can be important political events which can influence
business by bringing change in the atmosphere of business
in terms of policies, security and political stability.
3) Assessing probable impacts and responses:
• Assess impact of probable political events and develop
possible response to such initial impacts

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 Political Risk Analysis: Techniques
According to Steers, Ungson and Mowday (1985)
• Grand tours:
• Expert Hands
• Delphi Technique:
• Quantitative Methods:

According to Sundaram and Black (1997)

• Observational data: develop the index of political
stability and observe.
• Expert Based Technique: collecting and analyzing the
experts opinion and their rating on the issues.

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THANK YOU !