Chapter Two: The Political, Economy and Legal Environme nts Facing Business

3-1

Political and Legal Factors Influencing International Business Operations

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Definition of a 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

3-3

Individualism vs. Collectivism

Individualism: primacy of the rights and role of the individual Collectivism: primacy of the rights and role of the community

3-4

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

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The Political Spectrum

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Democracy
Wide participation by citizens in the decision-making process Five types:
Parliamentary Liberal Multiparty Representative Social
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Fundamental Elements of Democratic Political Systems

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Totalitarianism
Restricts decision making to a few individuals Types:
Authoritarianism Fascism Secular totalitarianism Theocratic totalitarianism

3-9

Trends in Political Systems

Third Wave of Democracy Engines of Democracy
1. The failure of totalitarian regimes to deliver economic progress 2. Improved communications technology 1. Economic dividends of increasing political freedom

3-10

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 Procedural Distributive Catastrophic
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Definition of a Legal System

The mechanism for creating, interpreting, and enforcing the laws in a specified jurisdiction Types:
Common law Civil law Theocratic law Customary law Mixed systems
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Trends in Legal Systems

The preference for stability The influence of national legacies

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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
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Operational Concerns that Face Managers Worldwide Starting a business Entering and enforcing contracts Hiring and firing local workers Closing down the business

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Strategic Concerns that Face Managers Worldwide Product safety and liability Marketplace behavior Product origin and local content Legal jurisdiction Arbitration

3-16

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
3-17

Legacies, Economics, and Orientation

Legal Legacies Wealth, Poverty, and Protection Cultural Orientation

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The Driver of Change

Countries that generate intellectual property are strong advocates of protecting the ownership rights.

2-19

How Are Contracts Enforced In Different Legal Systems?

A contract is a document that specifies the conditions under which an exchange is to occur and details the rights and obligations of the parties involved Contract law is the body of law that governs contract enforcement Under a common law system, contracts tend to be very detailed with all contingencies spelled out Under a civil law system, contracts tend to be much shorter and less specific because many issues are already covered in the civil code Many countries have ratified the United Nations Convention on Contracts for the International Sale of Goods (CIGS) which establishes a uniform set of rules governing certain aspects of the making and performance of everyday commercial contracts between buyers and sellers who have their places of business in different nations
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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
3-21

How Can Intellectual Property Be Protected?

Intellectual property - property that is the product of intellectual activity Can be protected using 1. Patents exclusive rights for a defined period to the manufacture, use, or sale of that invention 2. Copyrights the exclusive legal rights of authors, composers, playwrights, artists, and publishers to publish and disperse their work as they see fit 3. Trademarks design and names by which merchants or manufacturers designate and differentiate their products
2-22

How Can Intellectual Property Be Protected?

Protection of intellectual property rights differs from country to country
World Intellectual Property Organization Paris Convention for the Protection of Industrial Property

To avoid piracy, firms can

stay away from countries where intellectual property laws are lax file lawsuits lobby governments for international property rights agreements and enforcement
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How Are Property Rights And Corruption Related?

Property rights refer to the legal rights over the use to which a resource is put and over the use made of any income that may be derived from that resource Can be violated through
1. 2. Private action theft, piracy, blackmail Public action - legally - ex. excessive taxation or illegally - ex. bribes or blackmailing
high levels of corruption reduce foreign direct investment, the level of international trade, and the economic growth rate in a country

The Foreign Corrupt Practices Act makes it illegal for U.S. companies to bribe foreign government officials to obtain or maintain business over which that foreign official has 2-24 authority

Economic Systems
Centrally Planned
Government ownership of economic resources and state planning

Mixed
Government and private ownership of economic resoures split rather evenly

Market
Mostly private (individual or business) ownership of economic resources

Centrally Planned Economy

Government owns most land, factories, and other economic resources and plans nearly all economic activity
Welfare of the group is paramount Economic and social equality is the goal Communist system is needed

Asia Central Europe Eastern Europe Latin America

Russia (1917) China (1949) Cuba (1959)

Decline of Central Planning

Central planning failed to:
Create economic value Provide incentives Achieve rapid growth Satisfy consumer needs

Focus on China
Socialism with Chinese characteristics
Communist after civil war ended in 1949 Agricultural reforms began in 1979 Township and Village Enterprises legal in 1984 Aggressive reform since that time Political problems and social unrest Unemployment and migrant labor Eventual(?) reunification with Taiwan Advanced entrepreneurial and management skills

Challenges ahead

Mixed Economy
Government and private parties share ownership of land, factories, and other economic resources rather evenly Noble goals
Low unemployment and poverty Steady economic growth Equitable distribution of wealth

But stagnant

State-owned businesses uncompetitive Prices and taxes higher, living standards mixed Privatized state firms to boost competitiveness

Market Economy
Private parties (individuals or businesses) own vast majority of land, factories and other economic resources Supply
Quantity of a good or service that producers are willing to provide at a specific selling price

Demand
Quantity of a good or service that buyers are willing to purchase at a specific selling price

Laissez-Faire Economics
Less government interference in commerce
Free choice
Consumers choose freely from alternative purchase options

Free enterprise
Firms decide which products to sell and markets to enter

Price flexibility
Most prices follow the forces of supply and demand

Governments Role in a Market Economy Enforce antitrust laws Preserve property rights Provide fiscal and monetary stability Preserve political stability

Preserve Property Rights

Encourages risk-taking by people and business as claims to assets and future earnings are protected
Market economy needs strong property rights Entrepreneurs start new businesses Firms create new technologies and products

Provide Fiscal & Monetary Stability

Encourages commerce in a nation because it improves its reputation as a place to do business
Fiscal policies (taxation, government spending) Monetary policies (money supply, interest rates) Reduces overall uncertainty Improves business forecasts Holds inflation and unemployment low

Preserve Political Stability

Encourages businesses to engage in activities without fear of disrupted future operations
Promotes economic growth generally Reduces worries of political risk Improves chances for business survival

Economic Development
Economic well-being of one nations people relative to another nations people
- Economic output (agricultural, industrial, service) - Infrastructure (communications, transportation, power) - People (physical health, education level)

Productivity is key
Ratio of outputs (that created) to inputs (resources used to create output)

National Production
GDP is the value of goods and services that a nation produces during a one-year period (GNP adds international activities) Potential problems
Overlooks certain transactions Ignores economic growth rates Averages disguise regions May ignore purchasing power

Purchasing power parity

Relative ability of two countries currencies to buy the same basket of goods in those two countries

Classifying Countries
Developed Country Emerging Market
Highly industrialized, highly efficient, and whose people enjoy a high quality of life Newly industrialized countries plus those with potential to be newly industrialized Recently greater national production and exports from industrial operations Poor infrastructure and extremely low personal income

Newly Industrialized Country Developing Country

Economic Transition
Fundamental reorganization of an economy and the creation of new free-market institutions Reforms include:
Reduce budget deficits and expand credit Allow the price mechanism to determine prices and economic activity Legalize private firms and privatize state-owned assets within a property rights framework Remove barriers to trade and investment and eliminate currency controls Ensure social-welfare system to ease transition

Obstacles to Transition
Lack of managerial expertise Capital shortage Environmental degradation Cultural differences