CHAPTER 3

The Political and Legal

Environments Facing
Business
The Political and Legal Environments Facing Business

Chapter Objectives

• To discuss the philosophies and practices of a political system

• To profile trends in contemporary political systems
• To explain the idea of political risk and describe approaches to managing it
• To discuss philosophies and practices of the legal system
• To describe trends in contemporary legal systems
• To explain legal issues facing international companies

45%
The Political and Legal Environments Facing Business

45%
The Political and Legal Environments Facing Business

Political System

• The complete set of institutions, political organizations, and interest groups,

• The relationships among institutions, and the political norms and rules that govern
their functions

45%
The Political and Legal Environments Facing Business

Political Process Functions

• Interest articulation
• Interest organization
• Policy making
• Policy implementation and adjudication

45%
The Political and Legal Environments Facing Business

Individualism vs. Collectivism

• Individualism: primacy of the rights and role of the individual
• The political system with an individualistic orientation is best exemplified by the
United States.
• Its position that political officials and agencies have a limited role in society is a
central tenet of individualism.
• Individualistic countries encourages businesses to support the good of the greater
community by promoting fair and just competition.

45%
The Political and Legal Environments Facing Business

Individualism vs. Collectivism

• Collectivism: primacy of the rights and role of the community
• China advocates the position that government officials should intervene in the
structure of industries, conduct of companies and actions of managers to ensure
that they benefit society.
• Governments in other sorts of collectivist societies, such as Sweden, are more
inclined to take forceful actions that aggressively promote labor, social equality, and
workplace democracy.

45%
The Political and Legal Environments Facing Business

Political Ideology
• The system of ideas that expresses the goals, theories, and aims of a sociopolitical
program
• Most modern societies are pluralistic—different groups champion competing
political ideologies
• Pluralism arises because groups within countries can differ from each other in
language, class structure, ethnic background, tribal groups or religion.
• The ultimate test of any political system is its ability to hold a society together
despite pressures from different ideology.
• The two extremes on the political spectrum are democracy
45%
and totalitarianism.
The Political and Legal Environments Facing Business

Political Ideology

45%
The Political and Legal Environments Facing Business

Democracy
• Wide participation by citizens in the decision-making process
• The principle of democracy derive from the ancient Greek, who believed that all
citizens are politically and legally equal, and hence were entitled to freedom of
thought, opinion, belief, speech and association.
• The defining feature of democracy is freedom.
• Factors for evaluating freedom
a) Political rights
b) Civil liberties

45%
The Political and Legal Environments Facing Business

Democracy
Five types:
• Parliamentary - democratic form of government in which the party (or a coalition of
parties) with the greatest representation in the parliament (legislature) forms the
government, its leader becoming prime minister or chancellor.
Denmark/Japan/Sweden

• Liberalism- political and moral philosophy based on liberty, consent of the governed
and equality before the law. Estonia/Canada/Ireland

45%
The Political and Legal Environments Facing Business

Democracy
Five types:
• Multiparty - a political system in which multiple political parties across the political
spectrum run for national election, and all have the capacity to gain control of
government offices, separately or in coalition. Germany

• Representative - also known as indirect democracy or representative government, is

a type of democracy founded on the principle of elected officials representing a
group of people, as opposed to direct democracy. USA

45%
The Political and Legal Environments Facing Business

Democracy
Five types:
• Social - is a political, social and economic philosophy within socialism that supports
political and economic democracy. Democratic Socialist Republic of Sri Lanka and the
Socialist Republic of Vietnam

45%
The Political and Legal Environments Facing Business

Fundamental Elements of Democratic Political Systems

45%
The Political and Legal Environments Facing Business

In terms of political freedom, a country is rated as either:

• FREE in that it has a high degree of political rights and civil liberties. Australia,
Bahamas, Belgium, Canada, Chile, Czech Republic, Estonia, Japan, Mexico, South
Africa and South Korea
• PARTLY FREE in that it has tolerable degrees of political rights and civil liberties.
Albania, Brazil, Ethiopia, Malaysia, Nigeria and Russia
• NOT FREE in that it has low degrees of political rights and civil liberties. Algeria,
Cambodia, China, Egypt, Iraq, Kenya, North Korea, Saudi Arabia and Zimbabwe

45%
The Political and Legal Environments Facing Business

Totalitarianism

• Authoritarianism - one person or a small group has absolute control over all others.
Chile under South Africa, Russia

• Fascism - extreme form of nationalism that calls for the supremacy of the state. The
goal of a fascist state is control of people’s mind and souls. Germany under Hitler
and North Korea

45%
The Political and Legal Environments Facing Business

Totalitarianism

• Secular Totalitarianism - control is enforced through military power . Communism is

the leading example. Soviet Union, Cuba and to a lesser and lesser degree, China

• Theocratic Totalitarianism - religious leaders are the political leaders. Vatican , Saudi
Arabia, Afghanistan

45%
The Political and Legal Environments Facing Business

Trends in Political Systems

The trend toward democracy is increasing. Key drivers include:

• Breakdown of totalitarian regimes
• Improved communication technology
• Higher standards of living

45%
The Political and Legal Environments Facing Business

Definition of Political Risk

The risk that political decisions or events in a country negatively affect the
profitability or sustainability of an investment
Types:
• Systemic - most commonly, domestic and international companies face political risks
created by shifts in public policy.
• Procedural - Each day, people, products and funds move from point to point in the
global market. Each move creates a procedural transaction between units within a
company or country. Political actions sometimes create frictions that interfere with
these transactions. 45%
The Political and Legal Environments Facing Business

Types:
• Distributive - As foreign investors achieve greater success, some countries question
the distributive justice of the rewards, wondering whether they are getting their
“fair” share. Generally, countries do interfere by revising their tax codes, regulatory
structures and monetary policy to capture greater benefits from foreign companies.

• Catastrophic - This type of political risk includes those random political

developments that adversely affect the operations of all companies in a country.
While uncommon, their impact disrupts the business environment for all firms.

45%
The Political and Legal Environments Facing Business

Definition of a Legal System

• The mechanism for creating, interpreting, and enforcing the laws in a specified
jurisdiction
• Generally, legal systems differ from country to country in terms of their treatment of
any number of variables, including tradition, precedent, usage, custom or religious
percept.
Types:
a) Common law
b) Civil law
c) Theocratic law
d) Customary law
e) Mixed systems

45%
The Political and Legal Environments Facing Business

• Common law - This is based on tradition, precedent, custom and usage and
interpretation by the courts.

• Civil law - This is based on a systematic and extensive codification of laws. This is also
called a codified legal system. Judges, rather than law, apply existing legal and
procedural codes to resolve disputes.

• Theocratic law - This relies on religious and spiritual principles to define the legal
environment. Islamic law or Shari’a is the most prevalent theocraric system at
present. 45%
The Political and Legal Environments Facing Business

• Customary law - This anchors itself in the wisdom of daily experience or, more
intellectually, great spiritual or philosophical traditions. Few countries operate under
this system however, this still plays a significant role in matters of personal conduct,
in many countries with mixed legal systems.

• Mixed systems - This emerges when two or more of the preceding legal systems
functions in a country.

45%
The Political and Legal Environments Facing Business

Bases of Rules

• Rule of Man-ultimate power resides in a person

• Rule of Law-institutes a just political and social environment, guarantees the

enforceability of commercial contracts and business transactions, and safeguards
personal property and individual freedom

45%
The Political and Legal Environments Facing Business

Impact of Laws on International Business

• National laws affect all local business activities.

• National laws affect cross-border activities

• International treaties and conventions may govern some cross-border transactions

45%
The Political and Legal Environments Facing Business

Operational Concerns that Face Managers Worldwide

• Starting a business
• Entering and enforcing contracts
• Hiring and firing local workers
• Closing down the business

45%
The Political and Legal Environments Facing Business

Strategic Concerns that Face Managers Worldwide

• Product safety and liability

• Marketplace behavior
• Product origin and local content
• Legal jurisdiction
• Arbitration

45%
The Political and Legal Environments Facing Business

Intellectual Property
• Intangible property rights that are a result of intellectual effort
• Intellectual property rights refer to the right to control and derive the benefits from
writing, inventions, processes, and identifiers
• Local attitudes play a large role in piracy
• Generally, poorer countries provide weaker legal protection of intellectual property
than do richer countries.
• Cultural attitudes influence the protection of intellectual property rights.
Individualist societies are more vigilant than collectivist societies.

45%