University of London

Business and Management

in a Global Context

Chapter 2
Political, Economic and
Legal Environment
- Nageb’s Summary

Lecturer: M.Nageb
Chapter 2: Political, Economic and Legal environment

CHAPTER 2: FORMAL INSTITUTION - POLITICAL, ECONOMIC

AND LEGAL ENVIRONMENTS

Learning By the end of this chapter, and having completed the

Outcome Essential reading and activities, you should be able to:

• define the concept of institutions and delineate their

key role in reducing uncertainty

• assess the basic differences among political systems

and their influence on international business

• discuss the systemic differences among economies and

the related challenges for international business

• describe the basic differences between legal systems

in the world

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Chapter 2: Political, Economic and Legal environment

2.1 What are Formal Institutions?

2.1 Meaning • Institution-Based Perspective - represent

& Purpose of political, economic and legal environments / rules of the
Formal game
Institutions
• Purposes – to minimise
- Uncertainty – institutions minimise uncertainty of
doing overseas
- transaction cost – institution reduces transaction
cost as they may be less need to monitor,
negotiate and enforcing business dealing
- constrain opportunism – institution prevent
someone from operating with guile that is to their
own benefit. For e.g. strict laws ensure business
dealings are equitable for all.

2.2 Core Propositions

Two core Proposition 1 Managers and firms make decisions based

propositions on formal and Informal constrains
Proposition2 Informal institutions more important if
formal institutions are lacking


2.3 Political Systems – How country is governed? Use two
dimensions

Collectivism Individualism
• Collectivism more important – • Individualism and self expression
socialism more important

Totalitarian Democracy
Can be: Representative Democracy – people
- Communism make decisions through elected
- Theocratic govt.
- Tribal
- Right wing

2.3a Why are political systems important for International
business

- rules affect International business – for e.g. Laws ensures that

intellectual property and assets of businesses are protected

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Chapter 2: Political, Economic and Legal environment

- business can influence the legislative process – e.g. by lobbying

with member of parliaments and ministers businesses can voice their
concerns so that the government may change the laws benefiting
businesses. E.g. during 1997 recession Goh Chok Tong reduced the CPF
contribution to help businesses with their costs

- frequent changes in the rules is a cause of concern for

International business – constant changes in government policies
create uncertainty in doing business in the country. Eg Trump intends to
change Obama policies for Health Care and reduce the outflow of US
investment overseas.

2.4 Economic Systems – refers to how the country is governed

– five economic systems

1 Market • prices are determined by the price mechanism – i.e.

Economy demand and supply

2 Command • government decides what is good for the society and

owns most businesses e.g. N.Korea

3 Mixed • Essential services provided by government and non-

Economy essential owned by private sector e.g. France

4 • Market signals may bring some government

Coordinated intervention
Market - Germany and Singapore

5 Liberal • Price mechanism regulates the economy – UK, US,

Market Australia etc

2.5 Legal Systems

1 • formal rules – behaviour of directors

Characteristics
• laws – breach is a criminal offence – fraud

• court systems – judgement affects changes in law

2 Importance • rights and obligations in business – protects

consumers

• how business is done – sales of goods

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Chapter 2: Political, Economic and Legal environment

• regulates business practices – against pollution

3 Collectivist, • restrict private enterprise e.g. N.Korea

Totalitarian

4 • supports private enterprise

Individualistic
market • protects consumers rights

5 Three legal
systems Common Law • law of the land

• tradition, precedent, customs

• case law ( based on previous

court decisions)

Civil Law • Codes / Codified law

• judges apply law and interpret

law

Religious Law • religious teaching

• Islamic law – Shariah (as laid

down by the Koran)

6 Issues for Property • Can be violated by Private Action

International Rights ( theft, piracy) or Public Action (
Business corruption by officials )

Intellectual Patents • Rights to

Property inventor
Rights Copyright • authors,
composers
Trademark • for firms

Product • Developing countries - product

Safety safety standards are lower to
& Product reduce the costs to keep prices low
Liability – compromise safety standards -
issue of ethical dilemma

• firms are liable under the law if

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Chapter 2: Political, Economic and Legal environment

they violate safety standards –

product liability.

Corporate • This ensures that directors make

Governance decisions for the benefit of
stakeholders and not for
themselves

• Countries have code of practice

for directors to follow

2.6 Why some countries succeed while others fail?

Reasons why • investment and technological progress

countries
succeed or • innovation and entrepreneurship
fail
• higher education – improves skills

• sound macroeconomic policy of government

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Chapter 2: Political, Economic and Legal environment

May 2014

1. ‘ Environmental analysis is critical for international

business’. In the light of this statement discuss:

a. The main components of a PESTEL analysis (6marks)

b. What SWOT analysis is and how a Minimax approach to

developing strategy can be performed, using a company
example of your choice. (9 marks )

c. The components and importance of Gehmawat’s CAGE and

AAA framework, using examples to illustrate your points.
( 10 marks )

Reading for this question

Relevant material and references are in pp.89–96 of the subject guide
and: Willcocks, L. Global business management foundations. (Stratford:
Steve Brookes Publishing, 2013) [ISBN 9780956414533] Chapter 4.

Approaching the question

For (a) these are Political, Economic, Social, Technological, Environmental
and Legal, and require a description, albeit brief, of what each consists of.

For (b) discussion of Strengths, Weaknesses, Opportunities and Threats,

illustrated with a company example is a good answer. A very good answer
would supply a worked example of how strengths and opportunities are
used to gain competitive advantage. Strengths are used to meet threats,
opportunities are used to minimise weaknesses, and strategies are
generated to minimise weaknesses and threats.

For (c) CAGE is Cultural, Administrative, Geographical and Economic

distance, and should be described in detail with illustrative examples.
AAA is Aggregation, Arbitrage and Adaptation strategies which should
be described with illustrative examples drawn from the subject guide or
reading.

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Chapter 2: Political, Economic and Legal environment

2015 Zone A and Zone B

‘Formal and informal institutions greatly affect and shape the
strategies that are possible in specific countries and markets.’
Therefore:

a. Describe, using examples, the major political, economic and

legal institutions an international business needs to take into
account in designing its strategy. (7 marks)

b. Describe, using examples, the major informal institutions an

international business needs to take into account in designing
its strategy. (7 marks)

c. Define PESTEL and SWOT analyses and describe, using

examples, how these can be used to develop an environmental
analysis for international business strategy development
(11 marks).

Reading for this question

The material for answering this question appears in Chapters 2, 3 and 4 of
Willcocks (2013) and Chapters 2, 3 and 7 of the subject guide.

Approaching the question

For a), political system, the examiners expected a discussion of collectivism

versus individualism, different types of ‘totalitarian’ and ‘democratic’
systems, with examples (2 marks). Economic systems discussed should
include market, command and mixed economies with examples (2
marks). Legal system should include common, civil and religious law with
examples (2 marks). Some discussion as to how these impinge upon an
international business (1 mark – total 7 marks).

For b), informal institutions covers cultural, social, language, religious

and ethical dimensions. Some discussion was expected of culture, types
and their importance (2 marks) as well as of the roles of language and
social class (2 marks) and the role of different types of religion and ethics
(3 marks). Candidates were expected to point out the relevance of these
institutions to international business (total 7 marks).

For c), the examiners expected political, economic, social, technological,

environmental and legal analysis to be described. An illustrative example
of PESTEL gained 4 marks. A discussion of strengths, weaknesses,
opportunities and threats should have been illustrated with examples. The
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Chapter 2: Political, Economic and Legal environment

best answers provided a worked example of how strengths and

opportunities are used to gain competitive advantage, how strengths are
used to meet threats, how opportunities are used to minimise weaknesses,
and how strategies are generated to minimise weaknesses and threats
(7 marks).

May 2016 Zone A

‘ Firms operating internationally must continually analyse the

environments of the markets they operate in and seek to
enter.’ Using iluustrative examples, answer the following
questions:

a. Describe what a PESTEL framework and Ghemawat’s CAGE

framework cover in terms of formal and informal institutions
and environmental factors that shape and constrain
international business strategy. (8 marks)

b. Define culture and assess the context, cluster and

dimensions approaches to understanding differences in culture
and their impacts. (10marks)

c. What are the main trends in globalisation? Describe the

advantages and challenges these present to firms operating
internationally. (7marks)

Reading for this question

The material appears in the subject guide, Chapters 1, 2, 3 and 7, and
Willcocks (2013) Chapters 1, 3 and 4.

Approaching the question

On the whole well covered by many candidates the weakest answers being
on culture.

a. Candidates are expected to know political, economic, social,

technological environmental and legal factors, and cultural,
administrative, geographic and economic factors, and describe and
illustrate these in the time available.

b. Culture has many definitions (e.g. rules of the game) so two marks were
assigned for this and the rest for descriptions/assessment of cluster,
context and dimensions approaches.

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Chapter 2: Political, Economic and Legal environment

c. Examples of trends include reduced barriers to trade, and capital

investment, increased FDI, growing affluence in many countries creating
more attractive markets globally. We expected up to six trends, and also
assigned four marks for discussing advantages (e.g. three marks for a
quick mention of six of these) and a further four marks for discussion
of advantages (e.g. technological advances promote international trade,
lower barriers to trade and investment) and challenges (e.g. globalisation
promotes protectionism and regional barriers as a reaction; heightened
competition from diverse countries and industries).

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