OUR LADY OF THE PILLAR COLLEGE CAUAYAN

COLLEGE OF ACCOUNTANCY
INTERNATIONAL BUSINESS AND TRADE

MODULE 8:
POLITICS AND LAWS
Political System
 A set of formal institutions that constitute a government it includes legislative bodies, political,
parties, lobby groups and trade unions the system also defines how these groups interact with each
other.
 Is a concept in which theoretically regarded as a way of the government makes a policy and also to
make them more organized in their administration.

3 Major Political Systems

o Democracy
o Socialism
o Totalitarianism

Legal System
 A system for interpreting and enforcing laws. The laws, regulations, and rules establish norms for
conduct it incorporates institutions and procedures for ensuring order and resolving disputes in
commercial activities, as well as protecting intelectual property and taxing economic output

4 Major Legal System

o Common Law
o Civil Law
o Religion Law
o Mixed System

Rule of law: A legal system which laws are clear understood respected and fairly enforced

Sources of Country Risk

Political System Legal System

 Government laws, regulations, and rules that aim to.

 Political parties
 Legislative bodies • ensure order in commercial activates
 Lobbying groups • resolve disputes
 Trade unions • protect intellectual property
 Other political institutions • tax economic output

3 Major Political Systems

1. Totalitarianism
 Are nations in which the government does not permit its people to partake in political
decision making instead of giving the people a voice, a totalitarian country is ruled either by a
dictator or a group that has not been collectively elected by the people.
 Government controls all economic and political matters
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Politics and Laws
Discussion Notes of: Sherwin R. Magmanlac, MICB, CPA
 OUR LADY OF THE PILLAR COLLEGE CAUAYAN
COLLEGE OF ACCOUNTANCY
INTERNATIONAL BUSINESS AND TRADE

Dimensions of country Risk

o Harmful or unstable political system
o Laws and regulations unfavorable foreign firm
o Foreign investment code protection of rights
o Inadequate or underdeveloped legal system
o Bureaucracy and red fare
o Corruption and other ethical plunders
o Government intervention, protectionism to trade & investment

Politics and laws

o Either theocratic (religion-based) or secular
o A state party is led by a dictator. Membership in mandatory for those wanting to advance
o Power is sustained via secret police, propaganda, and regulation of free discussion and
criticism.
o Currently the State of Eritrea and North Korea are the only two nations in the world that still
have government classified as totalitarian dictatorships.

In connection to Economic System

o Totalitarianism is associated with command economies, where in the state makes all decisions
on what to produce how much to produce and what prices to charge.

2. Socialism
 Capital is vested in the state and used primarily as a means of production for use rather than
for profil.
 Group welfare outweighs individual welfare.
 Government’s role is to control the basic means of production, distribution and commercial
activity
 Socialism occurs in much of the world as social democracy (e.g, Western Europe, Brazil, india)
 Government intervention in the private sector
 Corporate income tax rate are higher

In connection to Economic System

o Socialism is associated with mixed economies, which have features of both market and
command economies, combining state intervention and market mechanism (e.g, Sweden,
Singapore)

3. Democracy
 Economic activity occurs freely, as per market forces
 Limited government the government performs only essential functions that serve all citizens,
such as national define, maintaining law and order, foreign relations and providing basic
infrastructure..
 Private property rights the ability to own property and assets and to increase one’s asset base
by accumulating private wealth. Property includes land, buildings, stocks, contracts, patents
Encourage initiative, ambitions, innovation.

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Politics and Laws
Discussion Notes of: Sherwin R. Magmanlac, MICB, CPA
 OUR LADY OF THE PILLAR COLLEGE CAUAYAN
COLLEGE OF ACCOUNTANCY
INTERNATIONAL BUSINESS AND TRADE

In connection in Economic System

o Democracy is associated with market economics and capitalism in which decisions are largely
left to market forces, that is, supply and demand

Relationship Between Economic and Political Freedom

o The more political freedom in a nation the more economic freedom its citizen enjoy Political
freedom is characterized by free and fair elections the right to form political parties fair
electoral laws, existence of a parliament or other legislative body, freedom from domination
by the military, foreign powers, or religious hierarchies, and self-determination for cultural
ethnic and religious minorities

Politics and Laws

 Economic freedom is related to the extent of government interference is business, the structures of
the regulatory environment, and the case with which commercial activity is carried out according to
market forces.

Four Major Types of Legal System

Common Law
 A legal system that originated in England and spread to Australia, Canada, USA and other former
members of the British Commonwealth (also known as case law)
 The basis of law is tradition, past practices, and legal precedents set by courts via interpretation of
statutes, legislation and past rulings
 Judge have much power to interpret laws based on the circumstances of individual cases thus,
common law is relatively flexible.

Civil Law
 Found in France, Germany, Italy, Japan, Turkey, and much of Latin America.
 Based on an all-inclusive system of laws that have been “codified” - clearly written by legislative
bodies
 Laws are more cast in stone and not strongly subject to interpretation by courts
 A key difference is that common law is mainly judicial in origin and based on court decisions, whereas
civil law is mainly legislative and based on laws passed by national and state legislatures

Religious Law
 Strongly influenced by religious beliefs, ethical codes, and moral values and viewed as mandated by a
supreme being
 Most important religious legal system are based on Hindu, Jewish, and Islamic law.
 Islamic law spells out norms of behavior regarding politics, economics, banking, contracts, marriage,
and many other social and business issues

Mixed Law
 Two or more legal system operating together
 The contrast between civil and common law has blurred as countries combine both systems
 Totalitarianism is most associated with religious law and socialist law.
 Democracy is associated with common law, civil law, and mixed systems

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Politics and Laws
Discussion Notes of: Sherwin R. Magmanlac, MICB, CPA
 OUR LADY OF THE PILLAR COLLEGE CAUAYAN
COLLEGE OF ACCOUNTANCY
INTERNATIONAL BUSINESS AND TRADE

Actors in Political and Legal Systems

 The government or the public sector operating at national and local levels
 International organizations such as the World Bank, World Trade Organization, and the United Nations
 Regional economic blocs, such as European Union, NAFTA, and many others
 Special interest groups such as labor unions and environmental advocates
 Local competing firms, which oppose foreign firms

Country Risk Produced by Political Systems

 Government Takeover of Corporate Assets
1. Confiscation Seizure of corporate assets without compensation
2. Expropriation Asset seizure with compensation
3. Nationalization Takeover of an entire industry , with or without compensation
 Creeping Expropriation
 Embargoes and sanctions
 Boycotts against firms and nations
 Wars, insurrection, and violence

Types of Country Risk Produced by Legal Systems

1. Country risk arising from the host country legal environment
a. Foreign investment laws
b. Controls on operating forms and practices
c. Marketing and distribution laws
d. Laws regarding income repatriation
e. Environmental laws
f. Contract laws
g. Inadequate or underdeveloped legal systems
h. Internet and e-commerce regulations
2. Country risk arising from the home country legal environment
a. The Foreign Corrupt Practices Acts (FCPA)
b. Anti-boycott regulations
c. Accounting and reporting laws
d. Transparency in financial reporting

Managing Country Risk

 The primary objective of managing country risk is to protect company investments and sustain
investment returns.
 The following are some items for multinationals to consider when faced with high-risk situations:

1. Empower local management – When risky situations arise, vest local management with the
responsibility to do what they have to do and take any and all necessary steps to protect the
safety of employees and safeguard company assets. On-the-ground management understands
better than anyone what’s happening, and they’re privy to the cultural nuances that can make or
break the successful management of risks surrounding an organization’s personnel, operations
and assets – particularly in a crisis.

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Politics and Laws
Discussion Notes of: Sherwin R. Magmanlac, MICB, CPA
 OUR LADY OF THE PILLAR COLLEGE CAUAYAN
COLLEGE OF ACCOUNTANCY
INTERNATIONAL BUSINESS AND TRADE

2. When high risk of confiscation or discrimination emerges – When the company is exposed to
confiscation (e.g., nationalization of the business or expropriation of assets) that can lead to
significant investment impairments or to some form of taxation, price controls, exchange controls
or other discrimination directed to the company that can reduce ROI significantly, these are
actions that can be taken to reduce the exposure:
a. Repatriate cash: If exchange controls and currency conditions allow, repatriate as much cash
as possible – after considering the requirements for sustaining local operations – to reduce the
risk of losses due to confiscation.
b. Manage down investment: Treat the operation as though it’s a “cash cow” until conditions
stabilize and management can better gauge the company’s ongoing interests in the country.
Avoid any additional capital investments while, as noted above, repatriating whatever cash
you can.
c. Divest/disperse/exit: Initiating an exit strategy by divesting assets in the cool of the day is
always an option, if there is a willing buyer. Obviously, it is not likely to be a viable option when
violence, civil war and/or anarchy break out. Moving tangible and non-tangible (e.g., data files,
intellectual property) assets out of harm’s way may be a good strategy to consider, if feasible.
d. Share the risk: While not a guarantee, entering into joint ventures with local/foreign partners is
a way to reduce exposure to confiscation risk because the presence of nationals can take a
multinational under the radar.

3. Consider the trends when assessing risk – Assess risk of similar exposure in other countries in
which you do business by understanding the driving forces of change and take proactive steps to
manage that exposure. For example, watch closely countries besieged with pervasive entrenched
corruption or facing a potential water supply crisis, food shortage crisis and/or unsustainable
population growth. The complexities and interconnections that underpin these global risks can
mobilize the masses. In addition, understand a country’s balance of payments, likely
macroeconomic performance and fiscal policy. Consider alternative potential scenarios affecting
these factors, assessing their impact, likelihood and velocity, as well as the company’s response
readiness.

4. Conduct a post-mortem – When an adverse event arises in a particular country, review the
assumptions your company had previously formed concerning that country from an economic,
political and financial system risk standpoint. If a consultant was used, what were the results of his
or her research and what advice emerged from that research? Did management see the event
coming? If not, why not? If management saw it coming, did the organization take steps to
prepare? Could the company have done anything differently? A post-mortem provides
management an opportunity to review what happened and determine “lessons learned” that they
can apply to other countries in which they operate.

Other Considerations:

1. Proactive environmental scanning: management should develop a comprehensive understanding

of the political and legal environment in target countries. Scanning- ongoing assessment of
potential risks and threats to the firm, via intelligence sources such as.
o Employees working in the host country
o Embassy and trade associations officials
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Politics and Laws
Discussion Notes of: Sherwin R. Magmanlac, MICB, CPA
 OUR LADY OF THE PILLAR COLLEGE CAUAYAN
COLLEGE OF ACCOUNTANCY
INTERNATIONAL BUSINESS AND TRADE

o Consulting firms, such as Business Entrepreneurial Risk Intelligence

2. Minimize exposure to country risks
3. Strict adherence to ethical standards: Firms that engage in questionable practices or operate
outside the law invite redress from the governments of the host countries where they do
business.
4. Alliances with qualified local partners: For example, firms often enter china and Russia by
partnering with local firms who assist in navigating the complex legal and political landscape.
5. Protection through legal contracts: Contract law varies widely. The firm must follow the law in
each country. Thee a approaches for resolving contract disputes
a. Conflict negotiation is a formal process of negotiation whose objectives is to resolve
differences in a friendly manner it is the least adversarial method and common in China.
b. In arbitration a neutral third party hears both sides of a case and decides in favor of one part
or the other based on an objective assessment of the facts
c. Litigation occurs when one party files a lawsuit against another. The most adversarial
approach, it is common in the United States

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Politics and Laws
Discussion Notes of: Sherwin R. Magmanlac, MICB, CPA