Chapter 3

The Political and

Legal Environments
Facing Business

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 Learning Objectives
 Discuss the philosophy and practices of the
political environment
 Profile trends in contemporary political systems
 Describe current trends in political ideologies and
their implications to MNE’s choices
 Explain political risk management
 Compare the relative benefits and drawbacks of
proactive versus passive political risk
management
 Discuss the principles and practices of the legal
system
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 The Political Environment
 Every country has its own political and legal
environment
 Companies must determine where, when, and
how to adjust their business practices to succeed
 Managers evaluate, monitor, and forecast political
environments
 A country’s political system refers to the
structural dimensions and power dynamics of its
government that specify institutions,
organizations, and interest groups, and define
the norms that govern political activities
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 Individualism vs. Collectivism
 Our political system emanates from our
philosophical belief or orientation, our
thought process, how we want to govern
ourselves
 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
 Why should we study the political system or the
political ideology of the ruling parties of a
country? What are the implications for business?
 A political ideology stipulates how society
ought to function and outlines the methods by
which it will do so. It affects government
spending, trade, and investment.
 Most modern societies are pluralistic
 different groups champion competing political
ideologies, examples: Democrats vs.
Republicans in the United States
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 Spectrum Analysis
 A political spectrum outlines the various
forms of political ideology
 Political freedom measures
 the degree to which fair and competitive
elections occur
 the extent to which individual and group
freedoms are guaranteed
 the legitimacy ascribed to the general rule of
law
 the freedom expression

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Spectrum Analysis
The Political Spectrum

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 Democracy
 In a democracy(a government “of the
people, by the people and for the people”)
 all citizens are politically and legally equal
 all are equally entitled to freedom of thought,
opinion, belief, speech, and association
 all equally command sovereign power over
public officials
 Prominent types of democracy include
 Representative
 Multiparty
 Parliamentary
 Social Copyright © 2015 Pearson Education, Inc. 3-8
 Modern History of Democracy
 Before World War I
 After World War II
 A decline in colonial empires
 Rise of democratic nation states
 Cold War
 Fall of Berlin Wall, 1989-democratic
governments/institutions are on the rise
 1990-2012
 Democracy in Latin America, Asia, Africa
 Arab Spring
 Is democracy universal-Western vs. Eastern
Models
9
Evolution, Democracy and the (Hegelian) Dialectic

Thesis

Synthesis
(Thesis)

Antithesis Synthesis
(Thesis)

Antithesis
Figure 1: Freedom Over the Years
Freedom Over the Years
68
66
64 Political
Average Score

62 Rights

60
Civil
58 Liberties
56
Economic
54 Freedom
52 (Heritage)
50
 Figure 2: Freedom Status

Freedom Status
70

60
Number of Countries

50

40 Not
Free
30 Partly
Free
20
Free
10

0
 Figure 3
Global Competitiveness Index and Political Rights

Plot of gci*pr$country. Symbol used is '*'.

G |
l | USA
o 56 + * SG SWE*
b 55 + DK *GE
a 54 + FI *NL
l 53 + CA *JP
52 + AU * U
C 51 + * BY ATW*NO
o 50 + * QA NZ *FR
m 49 + * UAE * MY SKA
p 48 + * SA IL *CZ
e 47 + * CN CL *SI
t 46 + * TH EE *
i 45 + * TN OM * BH * KW SP PT
t 44 + SAF LT*IT
i 43 + JO * AZ IN * ID CR *PA
v 42 + * RU * TR MX * BR HU *PL
e 41 + * KZ CO * BW RNA* LV UY *
n 40 + * VN EG * ALG * MA SLK * GT UA * MK EL * BG CRO *
e 39 + * LY PH * HN PE* AR GR
s 38 + * SY * GE * SN JM * DO
s 37 + * AM * NG * KE * AL SER
36 + TZ * PK EC * BD * BJ
I 35 + CM * CAM VE * UG * BA ZM * PY GH *
n 34 + KG * CI * ET * NI MW * BO * MON
d 33 + MG TJ
e 32 + * BF * MZ * ML
x 31 +
- 30 +
s 29 + * CHA
c 28 + * ZW
a |
l ---+-------------+-------------+-------------+-------------+-------------+-------------+--
e 14.29 28.57 42.86 57.14 71.43 85.71 100.00

Political Rights-scale of 100

NOTE: 22 obs had missing values. 43 obs hidden. 3 label characters hidden.
 Totalitarianism
 A totalitarian system subordinates the
individual to the interests of the collective
 monopolization of power by a single agent--
opposition is neither recognized nor tolerated.
 dissent is eliminated through indoctrination,
persecution, surveillance, propaganda,
censorship, and violence
 Prominent types of totalitarianism include
 Authoritarianism
 Fascism
 Secular
 Theocratic
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 The Standard of Freedom
 Freedom House, and independent
watchdog organization, assesses political
and civil freedom around the world
 Freedom House recognizes three types of
political systems
 Free
 Partly free
 Not free

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The Standard of Freedom
Map of Political Freedom, 2013

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Third Wave of Democratization
 Third Wave of Democratization
 number of democracies doubled in two
decades
 Engines of Democracy
1. The failure of totalitarian regimes to deliver
economic progress
2. Improved communications technology
3. Economic dividends of increasing political freedom

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 Democracy:
Recession and Retreat
 Democracy’s retreat
 just 26 of the world’s democracies are full
democracies
 Engines of Authoritarianism
 Political economy of growth
 Rhetoric vs. Reality - Inconsistencies
 Economic problems
 Who defines Democracy?

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 Democracy:
Recession and Retreat
Freedom in the World: Gains and Declines

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Political Ideology and the MNE
 MNE adapts to the political ideology of the
country
 What will the political map look like in the
future?
 The Washington Consensus
 The Beijing Consensus
 The Clash of Civilizations

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 Political Risk
 Political risk refers to the risk that
political decisions or events in a country
negatively affect the profitability or
sustainability of an investment
 Types of Political Risk: Systemic,
Procedural, Distributive, Catastrophic
 Political Risk may involve Nationalization
by the State (Confiscation, Expropriation,
and Domestication)

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Classifying Political Risk
Characteristics of Political Risk

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 Managing Political Risks
 Be a good corporate citizen (example:
participate in development projects,
literacy etc.)
 Expand power bases through business
relationships (example: joint venture,
licensing, political payoffs etc.)
 Study government attitude and participate
government incentive programs
 Maintain good relationship with political
allies, other embassies in the country
23
 The Legal Environment
 The legal system is the mechanism for
creating, interpreting, and enforcing the
laws in a specified jurisdiction.
 Types:
 Common law [based on precedent, traditions]
 Civil law [based upon a set of laws that
comprise a code]
 Theocratic law [based upon religious precepts]
 Customary law [local customs and practices,
example- indigenous societies]
 Mixed systems
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The Legal Environment
The Wide World of Legal Systems

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 Trends in Legal Systems
 What is the basis of rule in a country?
 The rule of man
 legal rights derive from the individual who
commands the power to impose them
 associated with a totalitarian system

 The rule of law

 systematic and objective laws applied by
public officials who are held accountable for
their administration
 associated with a democratic system

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Trends in Legal Systems
The Worldwide Practice of the Rule of Law

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 Implication for Managers
 Operational concerns/issues
 Starting a business
 Making and enforcing contracts
 Hiring and firing local workers
 Closing down the business
 Strategic concerns/issues
 Country Characteristics
 Product safety and liability
 Legal jurisdiction
 Intellectual property
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 Intellectual Property:
Rights and Protection
 Intellectual property refers to creative
ideas, expertise, or intangible insights that
grant its owner a competitive advantage
 Intellectual property rights refer to the
right to control and derive the benefits
from writing, inventions, processes, and
identifiers
 no “global” patent, trademark or copyright
exists

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 Intellectual Property:
Rights and Protection
 Attitudes towards intellectual property
 Historical legacies
 rule of man versus rule of law

 Economic circumstances
 levels of economic development

 Cultural orientation
 individualism versus collectivism

Copyright © 2015 Pearson Education, Inc. 3-30

 Chapter 3: Discussion Questions
1. Define political system and explain why a
business manager should study the political
system of a country.
2. How does democracy differ from totalitarianism?
Will the conduct of business be different in the
two systems? How?
3. Describe how the political ideologies are
changing in the world. How a manager can
adapt to such changes?
4. What is political risk? How can we manage
political risk?
5. Define the Types Legal Systems and their
implications in international business. 31
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