International Business Environments and Operations Part Two Comparative Environmental Frameworks

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Chapter Three The Political and Legal Environments Facing Business

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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

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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

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Individualism vs. Collectivism

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

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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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Parliamentary democracy, citizens exercise political power by electing representatives to a legislative branch of government called a parliament.
A liberal democracy originates in a constitution that protects certain individual freedoms (such as freedom of speech, assembly, and religion) and certain individual liberties (such as the right to property and privacy). All citizens, both public and private, are treated equally before the law and receive due process under it. A multiparty democracy defines the political system whereby three or more political parties, whether separately or as part of a coalition, have the right to direct the government. The multiparty system prevents the leadership of a single party from setting policy without negotiating compromises among the opposition parties.

A representative democracy, such as the United States, is one in which the peoples elected representatives hold ultimate sovereignty (power/control).
A social democracy advocates the use of democratic means to achieve a gradual transition from capitalism to socialism. This view of democracy rests on the belief that society must regulate and reform capitalism to control its intrinsic tendency toward injustice and opportunism.
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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

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In an authoritarian form of government, the regime tolerates no deviation from state ideology. Day-to-day life reflects unquestioning obedience to state authority Resistance incurs punishment Fascism is totalitarian and the Fascist State, as a synthesis and a unit which includes all values, interprets, develops, and lends additional power to the whole life of a people. The fascist ideal is the control of peoples minds, souls, and daily existence. Secular totalitarianism: In this system, a single political party forms a government in which only party members hold office, elections are controlled through unfair laws, dissent (disagree) is tolerated as long as it does not challenge the state, and organized religions are suppressed (concealed/not available). Theocratic totalitarianism: Under this system, government is an expression of the preferred deity (god), with leaders often claiming to represent the deitys interests on earth. Procedurally, the theocratic state follows ancient dogma (system of belief) in place of modern political or legal principles.
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Trends in Political Systems

Third Wave of Democracy
The number of nations that made the transition from non-democratic to democratic political systems, particularly during the 1970s and 1980s.

Engines of Democracy
1. The failure of totalitarian regimes to deliver economic progress (i.e: Berlin wall) 2. Improved communications technology 3. Economic dividends of increasing political freedom
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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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Systemic Risksrisks that impact all firms who operate in the particular political system Procedural RiskEach day, people, products, and funds move from point to point in the global market. Each move creates a procedural transaction between the units involved, whether units of a company or units of a country.

Distributive RiskAs foreign investors generate more profits in the local economy, the host country may begin to question the distributive justice of the rewards of operating in its market.

Catastrophic Riskincludes random political developments that adversely affect the operations of every company in a country.

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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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Common Law: system is based on tradition, judge-made precedent, and usage.

Civil Law: system is based on the systematic codification of laws and codes. Civil law systems charge political officialsnot government-employed judgeswith responsibility for specifying accessible, detailed, and written law that applies to all citizens. Rather than create law, as they do in the common law system, judges in the civil law system apply existing legal and procedural codes to resolve disputes.
Theocratic Law: system relies on religious doctrine, precepts, and beliefs to define the legal environment. Customary Law: Customary law is based on norms of behavior practiced over a long period. Mixed Systems: when a nation uses two or more of the four legal 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

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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

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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.

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All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.

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