** Introduction:

For a multinational enterprise to succeed in countries with different

political and legal environments, its management must carefully analyze the fit between
its corporate policies and the political and legal conditions of each particular nation in
which it operates. Then it’s must determine how these factors affect the ways in which
the firm can capture opportunities and deflect threats. The legal and political aspect is
very important in global marketing. "International law" can be defined as rules and
principles that states and nations consider binding upon themselves. This raises two
interesting characteristics of international law. The first is that "law" belongs to
individual nations and international law only exists to the degree that individual nations
are willing to relinquish their rights. The second is the lack of an adequate international
judicial and administrative framework or a body of law which would form the basis of a
truly comprehensive international legal system. The international business is also subject
to political decrees made by governments both in "home" and "host" countries. Home
governments can apply pressure not to deal with disapproved parties. These measures
may take the refusal to grant an export license, or withdrawal of export guarantee cover.
The host government may take measures like taxation, ownership controls, operating
restrictions or expropriation.

** Definition of Political Environment:

A political system is the complete set of institutions, political
organizations, and interest groups, the relationships among those institutions, and the
political norms and rules that govern their functions. Thus, it integrates the various parts
of a society into a viable, functioning entity. It also influences the extent to which
government intervenes in business and the way in which business is conducted both
domestically and internationally. The ultimate test of any political system is its ability to
hold a society together.

Political Environment for international business is government actions

which affects the operations of a company or business. These actions may be on local,
regional, national or international level. Business owners and managers pay close
attention to the political environment to gauge how government actions will affect their
company.

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** Factors of Political Environment:

(1) Sovereignty of Nations:

A sovereignty state is independent and free from all external control;

enjoy full legal equality with other states; govern its own territory, select its own
political, economic, and social systems; and has the power to enter into agreement with
other nations. Sovereignty refers to both power exercised by a state in relation to other
countries and supreme powers exercised over its own members. A state sets requirement
for citizenship, defines geographical boundaries, and control trade and the movement of
people and good across its borders. The ideal political climate for a multinational firm is
a stable, friendly government.

(2) Stability of Government Policies:

At the top of the list of political condition that concern foreign business
is the stability or instability of prevailing government policies. Government might change
or new policies parties might be elected, but the concern of the Multinational Corporation
is the continuity of the set of rules or code of behavior and the continuation of the rule of
law- regardless of which government is in power. A change in government, whether by
election or coup, does not always mean a change in the level of political risk.

(3) Ideologies of Political Parties:

Particularly important to the marketer is knowledge of the philosophies of

all major political parties within a country, since any one of them might become
dominant and alter prevailing attitudes. In those countries where there are two strong
political parties that typically succeed one another in control of the government, it
important to know the direction each party is likely to take. In Great Britain, for example,
the Labour Party traditionally has tended to be more restrictive regarding foreign trade
than the Conservative Party. The Labor Party when in control, has limited imports,
whereas the Conservative Party has tended to liberalize foreign trade when it is in power .
A foreign firm in Britain can expect to seesaw between the liberal trade policies of the
conservatives and the restrictive ones of the liberals.

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 (4) Nationalism Feeling of Citizens:

Economic nationalism, which exists to some degree within all countries,

is another factor important in assessing business climate. Nationalism can best be
described as an intense feeling of national pride and unity, an awakening of a nation’s
people to pride in their country. This pride can take an anti-foreign business bias, and
minor harassment and controls of foreign investment are supported, if not applauded.

** Political Risks of Global Business:

(1) Confiscation:
Confiscation means government of a country may take over the entire asset
of any multinational corporation, without any compensation. It may occur when the
relationship between two country are very poor. Here government of a country may
impose several rule and regulations, such as exchange control, import restriction etc
which affect the business. The most notable recent confiscation of United States property
occurred in Iran. The United States also has imposed an embargo against trade with Iran.

(2) Expropriation:
Less drastic, but still severe, is expropriation, which means where
government takeover assets of MNC with some compensation. Expropriation is an
extreme form of political action.

(3) Domestication:
A third type of risk is domestication, which occurs when host countries
take steps to transfer foreign investment to national control and ownership through a
serious of government decrees. Ways of domestication are-

 A transfer of ownership in part or totally to nationals.

 The promotion of a large number of nationals to higher levels of management.
 Greater decision-making powers resting with nationals.
 A greater number of components locally produced.
 Specific export regulations designed to dictate participation in world markets.

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** Economic Risks Associated with International Business:
International companies are confronted with a variety of economic risks that
often occur with little warning. Some economic risks are-

(1) Exchange Controls:

Exchange controls stem from shortages of foreign exchange held by a
country. When a nation faces shortage of foreign exchange, controls may be levied over
all movements of capital or selectively against the most politically vulnerable companies
to conserve the supply of foreign exchange for the most essential uses. A problem for the
foreign investor is getting profits and investments into the currency of the home country.

(2) Local-content laws:

In addition to restricting imports of essential supplies to force local
purchase, countries often require a portion of any product sold within the country to have
local content, that is, to contain locally made parts. Thailand, for example, requires that
all milk products contain at least 50 percent milk from local dairy farmers.

(3) Import Restrictions:

Import restrictions means government impose a selective restriction
on MNCs that they cannot import raw materials, machine, spare part from foreign
country ,they must purchase these from the host country and thereby create markets for
local industry. The problem becomes critical when there are no adequately developed
sources of supply within the country.

(4) Tax Controls:

Taxes must be classified as an economic risk when used as a means of
controlling foreign investments. In such cases, they are raised without warning and in
violation of formal agreements. India, for example, taxes PepsiCo and Coca-Cola
company 40 percent on all soda bottled in India.

(5) Price controls:

Essential products that command considerable public interest, such as
pharmaceuticals, food, oil, gas etc are often subjected to price controls. Such control
applied during inflationary period can be used to control the cost of living. They also may
be used to force foreign companies to sell equity to local interests.
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 (6) Labor Problems:
In many countries labor unions have strong government support that they
use effectively in obtaining special concessions from business. Layoffs may be forbidden,
profits may have to be shared, and an extraordinary number of services may have to be
provided. In fact, in many countries, foreign firms are considered fair game for the
demands of the domestic labor supply.

** Other Kinds of Political Risks:

(1) Political Sanctions:
In addition to economic risks, one or a group of nations may boycott
another nation, thereby stopping all trade between the countries, or may issue sanctions
against the trade of specific products. The United States has long-term boycotts of trade
with Cuba. Iran, Iraq, and Libya. The United States has come under some criticism for its
demand for continued sanctions against Cuba and Iraq and its threats of future sanctions
against countries that violate human rights issues.

(2) Political and Social Activists:

Although not usually officially sanctioned by the government, the
impact of political and social activists (PSAs) can also interrupt the normal flow of trade.
PSAs can range from those who seek to bring about peaceful change to those who resort
to violence and terrorism to affect change. When well organized, the actions of PSAs can
be effective. One of the most effective and best-known PSA actions was against Nestle
and the sale of baby formula in Third World markets. The worldwide boycott of Nestle
products resulted in substantial change in the company’s marketing.

(3) Violence and Terrorism:

Although not usually government initiated, violence is another related
risk for multinational companies to consider in assessing the political vulnerability of
their activities. The State Department reported 392 terrorist incidents worldwide in 2009,
up from 274 in 2008. Of those, 276 were directed at U.S. businesses, resulting in 133
casualties. Terrorism has many different goals. Multinationals are targeted to embarrass a
government and its relationship with to generate funds by kidnapping executives to

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finance terrorist goals, and to use as pawns in political or social disputes not specifically
directed at them.
(4) Cyber terrorism:
New on the horizon is the potential for cyber terrorism. Although in its
infancy, the internet is a vehicle for terrorist attacks by foreign and domestic antagonists
wishing to inflict damage to a company with little chance of being caught. One problem
in tracing a cyber terrorist is that is that it is hard to determine if a cyber attack has been
launched by a rogue state, a terrorist, or by a hacker as a prank, The “I Love You” worm,
which caused an estimated $25 billion in damage was probably just an out-of-control
prank. However, the Melissa virus and the Denial of Service (DoS) attacks that
overloaded the websites of CNN, ZDNet, Yahoo, and Amazon.com with a flood of
electronic massages and crippled them for hours were considered to be purposeful attacks
on specific targets. Whether perpetrated by pranksters or hackers out to do harm, these
incidents show that tools for cyber terrorism can be developed to do considerable damage
to a company, an entire industry, or a country’s infrastructure.

** Reducing Political Vulnerability:

Even though a company cannot directly control or alter the political
environment of the country within which it operates, but there are measures that can
lessen the degree of risk for specific business venture. These measures are-

(1) Good corporate Citizenship:

As long as such fears persist, the political climate for foreign investors
will continue to be hostile. Are there ways of allaying these fears? A list of suggestions
made years ago is still appropriate for a company that intends to be a good corporate
citizen and thereby minimize its political vulnerability. A company is advised to
remember the following:

a. It is a guest in the country and should act accordingly.

b. The profits of an enterprise are not solely the company’s; the local national
employees and the economy of the country should also benefit.
c. It is not wise to try to win over new customers by completely Americanizing
them.
d. Although English is an accepted language overseas, a fluency in the local
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 language goes far in making sales and cementing good public relations.
e. The company should try to contribute to the country’s economy and culture
with worthwhile public projects.
f. It should train its executives and their families to act appropriately in the
foreign environment.
g. It is best not to conduct business from the home country but to staff foreign offices
with competent nationals and supervise the operation from the home country.

(2) Managing External Affairs:

Companies manage external affairs in foreign markets to
ensure that the host government and the public are aware of their contributions to the
economic, social or human development of the country. Relations between governments
and MNCs are generally positive if the investment-

a. Improves the balance of payments by increasing exports or reducing imports

through import substitution ;
b. Uses locally produced resources;
c. Transfers capital, technology, and/or skills
d. Creates jobs;
e. Makes tax contributions.

However well designed and executed external affairs programs are, they are never
better than the behavior of the company. Regardless of how well multinational companies
lessen political vulnerability through investment and business decisions, a task they all
face is maintaining a positive public image where they do business.

** Operational Strategies to Lessen Political Risk:

In addition to corporate activities focused on the social and economic
goals of the host country and good corporate citizenship, MNCs can use other strategies
to minimize political vulnerability and risk. These strategies are-

(1) Joint Ventures:

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 Typically less susceptible to political harassment, joint
ventures can be with locals or other third-country multinational companies; in both cases,
a company’s financial exposure is limited. A joint venture with locals helps minimize anti
MNC feelings, and a joint venture with another MNC add the additional bargaining
power of a third country.

(2) Expanding the Investment Base:

Including several investors and banks in financing an
investment in the host country is another strategy. This has the advantage of engaging the
power of the banks whenever any kind of government takeover of harassment is
threatened. This strategy becomes especially powerful if the banks have made loans to
the host country; if the government threatens expropriation or other types of takeover, the
financing bank has substantial power with the government.

(3) Marketing and Distribution:

Controlling distribution in markets outside the country can be
used effectively if an investment should be expropriated; the expropriating country would
lose access to world markets. This has proved especially useful for MNCs in the
extractive industries, where world markets for iron ore, copper, and so forth are crucial to
the success of the investment. Peru found that when Marcona Mining Company was
expropriated, the country lost access to markets around the world.

(4) Licensing:
A strategy that some firms find eliminates almost all risks is
to license technology for a fee. Licensing can be effective in situations where the
technology is unique and the risk is high. Of course, there is some risk assumed because
the licensee can refuse to pay the required fees while continuing to use the technology.

(5) Planned Domestication:

The strategies just discussed can be effective in forestalling
or minimizing the effect of a total takeover. However, in those cases where an investment
is being domesticated by the host country, the most effective long-range solution is
planned phasing out, that is, planned domestication. This is not the preferred business
practice, but the alternative of government-initiated domestication can be as disastrous as
confiscation. As a reasonable response to the potential of domestication, planned

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domestication can be profitable and operationally expedient for the foreign investor.
Planned domestication is, in essence, a gradual process of participating with nationals in
all phases of company operations.

(6) Political Payoff:

One approach to dealing with political vulnerability is the
political pay of an attempt to lessen political risks by paying those in power to intervene
on behalf of the multinational company. Political payoffs, or bribery, have been used to
lessen the negative effects of a variety of problems. Paying heads of state to avoid
confiscatory taxes or expulsion, paying fees to agents to ensure the acceptance of sales
contracts, and providing monetary encouragement to an assortment of people whose
actions can affect the effectiveness of a company’s programs are decisions that frequently
confront multinational managers and raise ethical questions.

** Ideological Forces to Describe Government Parties and

People:
(1) Communism:
Communism is a social, political and economic ideology that
aims at the establishment of classless, money less and socialist society structured up
common ownership of the means of the production. It wants to become the only rolling
party over the world.

(2) Socialism:
Socialism is an economic system, characterized by social
ownership, where all the mean of production, policies etc. are owned by govt. Here govt.
is working for social welfare and development society and state. A socialist economic
system would consist of an organization of production to directly satisfy economic
demands and human needs, so that goods and services would be produced directly for use
instead of for private profit driven by the accumulation of capital, and accounting would
be based on physical quantities, a common physical magnitude, or a direct measure of
labor-time.

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 (3) Capitalism:
Capitalism is an economic system where all the means of
production has been controlled by private ownership. They create/manufacture all the
goods and services for generating profit or income, and accumulate all the capital. Here,
there have no power of the government and they encourage the business man. As why
higher class people become benefitted then the mid lower level people.

(4) Conservatism:
Conservatism is a political and social philosophy that promotes
the maintenance of traditional institutions and supports, at the most, minimal and gradual
change in society. The supporters of conservatism are against the capitalism.

(5) Liberal:
Liberalism is the belief in liberty and equality. Liberals espouse
a wide array of views depending on their understanding of these principles, but generally
liberals support ideas such as constitutionalism, liberal democracy, free and fair elections,
human rights, capitalism, and the free exercise of religion.

(6) Right wing:

Right wing can be defined as the support or acceptance of social
hierarchy. Inequality is viewed by the Right as inevitable, natural, normal, or desirable,
whether it arises through traditional social differences or from competition in market
economies.

(7) Left wing:

Left wing can be defined as views which generally support
social change to create a more egalitarian society. They usually involve a concern for
those in society who are disadvantaged relative to others and an assumption that there are
unjustified inequalities (which right-wing politics views as natural or traditional) that
should be reduced or abolished.

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** Definition of Legal Environment:
The government imposes rules, regulations, and laws to ensure that the
general public is protected from the negative aspects of business activity. Government
intervention also takes place to protect the interests of businesses. Common legislation
affecting businesses include: consumer protection legislation, employee protection
legislation, competition legislation, social and environmental protection legislation

The set of rules and regulations to be abiding by law stimulating and

surrounding the business is known as legal environment.

Factors that provide rules, and penalties for violations, designed to

protect society and consumers from unfair business practices and to protect businesses
from unfair competitive practices is called Legal Environment. It sets the basic rules for
how a business can operate in society; changes in the political environment often lead to
changes in the legal environment and in the way existing laws are enforced.

** Bases of Legal Systems:

(1) Common Law:

Common law derived from English law and found in England, the
United States, Canada, and other countries once under English influence. Common law,
also known as case law, is law developed by judges through decisions of courts and
similar tribunals rather than through legislative statutes or executive branch action. A
"common law system" is a legal system that gives great precedential weight to common
law, on the principle that it is unfair to treat similar facts differently on different
occasions. If, however, the court finds that the current dispute is fundamentally distinct
from all previous cases (called a "matter of first impression"), judges have the authority
and duty to make law by creating precedent. Thereafter, the new decision becomes
precedent, and will bind future courts.

(2) Code Law:

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 Code law, on the other hand, is based on an all-inclusive system of
written rules (codes) of law. Code law, derived from Roman law and found in Germany,
Japan, France, and in non-Islamic and non-Marxist countries. Under code law, the legal
system is generally divided into three separate codes: civil, criminal, and commercial.

(a) Civil Law:

The system of law concerned with private relations
between members of a community rather than criminal, military, or religious affairs.
Civil law seeks to resolve non-criminal disputes such as disagreements over the meaning
of contracts, property ownership, divorce, child custody, and damages for personal and
property damage. A civil court is a place where people can solve their problems with
people peacefully.

(b) Criminal Law:

A system of law concerned with those who commit crimes.
It might be defined as the body of rules that defines conduct that is not allowed because
it is held to threaten, harm or endanger the safety and welfare of people, and that sets out
the punishment to be imposed on people who do not obey these laws.

(c) Commercial Law:

Commercial law (sometimes known as business law) is the
body of law that governs business and commercial transactions. It is often considered to
be a branch of civil law.

(3) Islamic Law:

Islamic law derived from the interpretation of the Koran and found
in Pakistan, Iran, Saudi Arabia, and other Islamic states. The basis for the Shari’ah
(Islamic law) is interpretation of the Koran. It encompasses religious duties and
obligations as well as the secular aspect of law regulating human acts. Broadly speaking,
Islamic law defines a complete system that prescribes specific patterns of social and
economic behavior for all individuals. The Islamic law of contracts states that any given
transaction should be devoid of riba, which is defined as unlawful advantage by way of
excess of deferment, that is, interest or usury.

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 (4) Marxist- Socialist Law:
As socialist countries become more directly involved in trade with
Non-Marxist countries, it has been necessary to develop a commercial legal system that
permits them to engage in active international commerce. For example, Central Europe
countries such as the Czech Republic and Poland had comprehensive codified legal
systems before communism took over, and their pre-World War II commercial legal
codes have been revised and reinstituted.

(5) Mixture of the System:

Mixture of earlier system is called mixture of the system.

** International Dispute Resolution Method:

(1) Negotiation:
The first step in any dispute is to try to resolve the issue informally
through negotiation, but if that fails the foreign marketer must resort to more resolute
action.

(2) Conciliation:
Conciliation (also known as mediation) is a nonbinding agreement
between parties to resolve disputes by asking a third party to mediate differences. The
function of the mediator is to carefully listen to each party and to explore, clarify, and
discuss the various practical options and possibilities for a solution with the intent that the
parties will agree on a solution. The track record for the conciliation process is excellent,
with a majority of disputes reaching settlement and leading to the resumption of business
between the disputants.

(3) Arbitration:
If conciliation is not used or an agreement cannot be achieved, the
next step often used is arbitration. When all else fails, arbitration rather than litigation is
preferred method for resolving international commercial disputes. The usual arbitration
13
procedure is for the parties involved to select a disinterested and informed party or parties
as referee to determine the merits of the case and make a judgment that both parties agree
to honor.

(4) Litigation:
Lawsuits in pubic courts are avoided for many reasons. Most
observers of lawsuits between citizens of different countries believe that almost all
victories are spurious because the cost, frustrating delays, and extended aggravation that
these cases produce are more oppressive by far than any matter of comparable size.

** Conclusion:
Upon crossing the national borders an international marketer is faced with
a new political environment. As every marketer realizes the implication of political
environment on business, it becomes necessary for him to understand and gauge the
political risk he is undertaking and the options available to him for managing the same.
So also he must undertake an analysis of the legal environment. Managers involved in
international marketing are not supposed to be experts in law. What is necessary is to
have an appreciation of the legal problems that may arise while negotiating or
implementing an export contract. So, the manager of the MNCs must be aware about the
political and legal environment of the host country which is very important for the
company.

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 References

 International Business, John D. Daniels, Lee H. Radebaugh, Daniel P.

Sullivan, 10th Edition
 www.thefreedictionary.com
 www.egyankosh.ac.in/bitstream/123456789/35459/1/Unit-5.pdf
 en.wikipedia.org/wiki
 www.businessdictionary.com
 www.bitpipe.com
 www.indiastudychannel.com

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