International Business Management (Chapter 8)

1
International Business
Rakesh Mohan Joshi
Professor & Chairperson, IIFT New Delhi
Copyright @ Oxford University Press Chapter 8: Political and Legal

International Business R. M. Joshi Environment
Chapter 8
POLITICAL AND
LEGAL ENVIRONMENT

LEARNING OBJECTIVES
 To explain the significance of the political and
legal environment in international business
 To discuss various forms of political systems
 To explicate different types of legal systems
 To elaborate principles of international law
 To elucidate risks in international business
 To explain methods of measuring and
managing risks
Significance of understanding
International Political & Legal Environment
An international firm needs to operate in
countries having diverse political and legal
frameworks that, at times, conflict with its home
country. Value judgments made from the
perspective of the home country considerably
hinders objective decision-making in the diverse
international scenario. Therefore, a thorough
conceptual understanding of political and legal
environments affecting international business
operations is needed.
INTERNATIONAL POLITICAL ENVIRONMENT
The political environment of the country of

operation becomes increasingly important for an
internationalizing firm as it moves from exports
to foreign direct investment (FDI). Cordial
political relations between the firm’s home
country and the host countries have a direct
favourable impact on its foreign operations. As a
firm expands internationally and begins to
operate in multiple countries, the political and
legal issues become increasingly complex.
Political System
It comprise of various stakeholders, such as

the government, political parties with
different ideologies, labour unions, religious
organizations, environmental activists, and
various NGOs.

Political Ideology
A set of ideas or beliefs that people hold

about their political regime and its
institutions about their position and role in
it.

Types of government: economic
systems
Communism: Form of government based on the
concept of a classless society where all the major factors of
production are owned by the government and shared by all
the people rather than profit-seeking enterprises, for the
benefit of the society.
Socialism: A form of government where basic and
heavy industries are operated by the government so as to
ensure social welfare objectives wherein small businesses
may be privately owned.
Capitalism: An economic system which provides
complete freedom of private ownership of productive
resources and industries.

Types of government: political
systems
Democracy: Government by the people
where citizens are directly involved in decision
making.
Totalitarianism: Dictatorial form of
centralized government, usually in the hands
of a dictator who regulates every aspect of
the state. Various forms of totalitarianism
include:
• Secular totalitarianism
• Fascist totalitarianism
• Authoritarian totalitarianism
• Communist totalitarianism
• Theocratic totalitarianism
Types of government: structure
 Parliamentary: The government consults
its citizens from time to time and the
parliament has power to formulate and
execute laws.
 Commonwealth Countries: Countries
representing constitutional monarchies
which recognize Queen Elizabeth II as head
of the sate over an independent
government.

•Monarchies: Countries that have monarchs as the
heads of government. There may be either
constitutional or absolute monarchies.
•Theocracy: The rule of god where the civil leader is
believed to have a direct personal connection with god.

Trade Embargos: Prohibiting trade
completely with a country so as to
economically isolate it and apply political
pressure on its government.
Trade Sanctions: Imposing selective
coercive measures to restrict trade from a
country .
Bureaucracy: Form of administration
based on hierarchical structure governed by
a set of written rules and established
procedures. The term is often used to
describe inefficient and obstructive
administrative process and red-tapism.
Terrorism: Systematic use of violence to

create fear in general public with an
objective to achieve a political goal or
convey a political message.
INTERNATIONAL LEGAL ENVIRONMENT
Firms operating internationally face major

challenges in conforming to different laws,
regulations, and legal systems in different
countries. International mangers need to
understand the types of legal systems followed
in the countries of their operations before
entering into legal contracts.

Judicial Independence and
Efficiency
A fair judicial system also reduces

political risks in overseas markets. The
level of judicial independence and
efficiency differs widely among
countries.

International Legal Systems

Common Law: Law based on traditions, past
practices, and legal precedents set by the courts
through interpretation of statutes, legal
legislations, and past rulings. It depends less on
written statutes and codes.
Common law originated from England and it is

followed in most of the former British colonies,
such as India, United Kingdom, the United
States, Canada, Australia, and New Zealand.

Civil Law: Law based on a
comprehensive set of written statutes. It
is derived from the Roman law and is
followed in most of continental Europe,
Japan, and Latin America.

Socialistic Law: Socialist law traditionally
advocates ownership of most property by the
state or state-owned public enterprises,
prohibiting free entry to foreign firms.
This law is derived from the Marxist socialist

system and continues to influence legal
framework in former communist countries, such
as the CIS, China, North Korea, Vietnam, and
Cuba.
Theocratic Law: The legal system based
on religious doctrine, precepts, and
beliefs. For instance, the Hebrew law and
the Islamic law are derived from religious
doctrines and their scholarly
interpretations.

Principles of International Law
International law is less coherent

compared to domestic law since it
embodies a multiplicity of treaties and
conventions besides the laws of
individual countries.

Principles of International Law
 Principle of Sovereignty
 International Jurisdiction
• Nationality Principle
• Territoriality Principle
• Protective Principle
 Doctrine of Comity
 Act of State Doctrine
 Treatment and Right of Aliens
 Forum for Hearing and Setting Disputes

United Nations Commission on
International Trade Law (UNCITRAL)
Established in 1966, UNCITRAL aims to
reduce and harmonize and unify the laws
of international trade.

RISKS IN INTERNATIONAL BUSINESS

Commercial Risks:
Risks such as non-acceptance of

goods, non-payment or insolvency
of the importer.

Economic Risks:
Restrictions imposed on business activities on the

grounds of national security, conserving human
and natural resources, scarcity of foreign
exchange, to curb unfair trade practices and to
provide protection to domestic industries.

Political Risks:
Possibility of political decisions,

events, or conditions in an overseas
market or country that adversely
affect the international business that
include confiscation, expropriation,
nationalisation, and domestication.

BERI Index
It provides risk forecasts for about 50

countries throughout the world and a
broad assessment of the country’s
business climate on 15 economic,
political, and financial factors on a
scale from zero to four.
EIU’s Risk Indices
It monitors operational risks for 150 countries on

a scale of 0 to 100. The overall score includes an
aggregate of ten categories of risks, such as
security, political stability, government
effectiveness, legal and regulatory, macro-
economic, foreign trade and payments, financial,
tax policy, labour markets, and infrastructure.

Global Political Risk Index (GPRI)
GPRI is a comparative index to monitor

political risks in 24 emerging markets,
including India, China, Brazil, Russia, and
South Africa. It serves as an ‘early
warning’ system to anticipate critical
trends and provides a measure for the
country’s capacity to withstand political,
economic, security-related, and social
shocks.
Failed States Index
The Failed States Index is a useful tool to carry

out the cross-country comparison of the world’s
weakest states. It uses 12 social, economic,
political, and military indicators and ranks on a
scale of 0–120 to assess about 177 states in
order of their vulnerability to violent internal
conflict and societal deterioration.
Managing Risks in International
Business
 Strategic Management of Political Risks
• Employing locals
• Sharing ownership
• Increasing perceived economic benefits to the
host country
• Follow political neutrality
• Assuring social responsibility
• Adapting to local environment
 Insurance and Guarantees
• Export Credit Guarantee Corporation
• MIGA’s guarantees against non-commercial
(political) risks

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Copyright @ Oxford University Press Chapter 8: Political and Legal

Copyright @ Oxford University Press Chapter 8: Political and Legal

The political environment of the country of

It comprise of various stakeholders, such as

Copyright @ Oxford University Press Chapter 8: Political and Legal

A set of ideas or beliefs that people hold

Copyright @ Oxford University Press Chapter 8: Political and Legal

Copyright @ Oxford University Press Chapter 8: Political and Legal

Copyright @ Oxford University Press Chapter 8: Political and Legal

heads of government. There may be either

constitutional or absolute monarchies.

•Theocracy: The rule of god where the civil leader is

believed to have a direct personal connection with god.

Copyright @ Oxford University Press Chapter 8: Political and Legal

completely with a country so as to

economically isolate it and apply political

pressure on its government.

Trade Sanctions: Imposing selective

coercive measures to restrict trade from a

Terrorism: Systematic use of violence to

Firms operating internationally face major

Copyright @ Oxford University Press Chapter 8: Political and Legal

A fair judicial system also reduces

Copyright @ Oxford University Press Chapter 8: Political and Legal

Copyright @ Oxford University Press Chapter 8: Political and Legal

Common law originated from England and it is

Copyright @ Oxford University Press Chapter 8: Political and Legal

Copyright @ Oxford University Press Chapter 8: Political and Legal

This law is derived from the Marxist socialist

Copyright @ Oxford University Press Chapter 8: Political and Legal

International law is less coherent

Copyright @ Oxford University Press Chapter 8: Political and Legal

Copyright @ Oxford University Press Chapter 8: Political and Legal

Established in 1966, UNCITRAL aims to

reduce and harmonize and unify the laws

Copyright @ Oxford University Press Chapter 8: Political and Legal

Copyright @ Oxford University Press Chapter 8: Political and Legal

Risks such as non-acceptance of

Copyright @ Oxford University Press Chapter 8: Political and Legal

Restrictions imposed on business activities on the

Copyright @ Oxford University Press Chapter 8: Political and Legal

Possibility of political decisions,

Copyright @ Oxford University Press Chapter 8: Political and Legal

It provides risk forecasts for about 50

It monitors operational risks for 150 countries on

Copyright @ Oxford University Press Chapter 8: Political and Legal

GPRI is a comparative index to monitor

The Failed States Index is a useful tool to carry

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