Lecture-4 A
Lecture-4 A
Business
The Political and Legal
Environments Facing Business
Chapter Objectives
Discuss the different functions political
systems perform
Compare political regimes and how they
influence managerial decisions
Describe how management formulates and
implements strategies to deal with differing
political environments
Study different types of legal systems and
relationships
Exam major legal issues in international
business
3-2
NAFTA: The North American Free Trade Agreement; CAIS :Central
America Integration System; UNASUR: Union of South American
Nations; EU: European Union; AU : African Union; PIF: Pacific
Islands Forum; AL : Arab League; SCO: Shanghai Cooperation
Organization
Political Spectrum
3-3
Introduction
3-8
Indicators of Political
Rights
Degree to which fair & competitive elections occur
Ability of voters to endow representatives with
real power
Ability to organize political parties
Existence of safeguards on the rights of minorities
3-4
Indicators of Civil
Liberties
Existence of freedom of the press
Equality under the law for all individuals
Extent of personal social freedoms
Degree of freedom from extreme
governmental indifference or corruption
3-6
Comparative Measures of
Freedom
POLITICAL RIGHTS
CIVIL LIBERTIES
3-7
Totalitarianism
A political system in which a single agent,
whether an individual, group, or party,
monopolizes all political power.
Aims to subordinate all aspects of the day-to-
day life of people to the power of the state.
Merging the concepts of the state and the
people.
Order is often imposed through military
power.
Neither recognizes nor permits opposition.
Tools used include: violence, persecution,
propaganda, censorship.
3-9
Authoritarianism: a political system that
aims to rule completely all affairs of all
citizens.
Fascism: to control people’s minds and
souls through the supremacy of the state.
Secular Totalitarianism: using the power
of the state or the army to enforce control
of all aspects of the business
environment. Communism and total
government ownership and control of the
factors of production.
Theocratic Totalitarianism: religious
leaders are the political leaders,
Trends in Political Systems
1. Breakdown of Totalitarian Regimes.
Many totalitarian regimes failed to deliver
economic progress to the vast majority of their
populations.
3-10
Political Risks for International
Business
Political Risk:
Risk
The chance that political
decisions, events, or conditions
in a country will affect the
business environment in ways
that lead investors:
- To lose some or all of the value
of their investment, or
- Be forced to accept a lower than
expected rate of return.
3-11
Sources of Political Risk
Systemic: Political risk created by shifts in public
policy, such as a new political leadership that may
adopt a different approach than its predecessor.
Procedural: Political actions can sometimes create
frictions that interfere with the procedural
transactions between units. (Government
corruption, labor disputes, a partisan judicial
system)
Distributive: Political actions that aim to claim a
greater share of rewards.
Catastrophic: Random political developments.
Political Strategies for
International Businesses
Identify the exact issue
• Trade barrier?
• Environmental standards?
• Workers rights, etc?
Define/determine the political aspect of the issue
Assess the potential political action of other
companies
Identify important institutions and individuals
Formulate strategies
• Key objectives
• Alternatives
• Probable effectiveness
3-13
Legal Environment
Common law systems (tradition/precedent)
• United States
• United Kingdom
Civil law: based on a systematic and extensive codification
of laws. Political officials prepare a written collection of
laws. Judges apply existing laws instead of creating them.
• Germany
• France
• Japan
Theocratic law (based on religious principles and rules)
Islamic Law that is based on the Qur’an, the practices of the prophet,
the writings of scholars, and consensus of the community.
• Sudan
• Pakistan
A Customary Law System: follows the wisdom of daily
experience.
A Mixed Legal System. 3-14
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.
Legal Issues in International Business
3-16