International Business

by
Daniels and Radebaugh

Chapter 3
Political and Legal
Environments Facing
Business
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Objectives
To discuss the different functions that political systems
perform
To compare democratic and totalitarian political regimes and
discuss how they can influence managerial decisions
To describe how management can formulate and implement
strategies to deal with foreign political environments
To study the different types of legal systems and the legal
relationships that exist between countries
To examine the major legal issues in IB

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Cultural Influences on International Business

EXTERNAL
INFLUENCES
PHYSICAL AND
SOCIETAL FACTORS
Political policies and
legal practices
Cultural factors
Economic forces
Geographical influences

COMPETITIVE
ENVIRONMENT

OPERATIONS
OBJECTIVES
Basic political
ideologies
Impact of the political
system on management
decisions
Formulating and
implementing political
strategies
Legal environment

STRATEGY

MEANS

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The Political Environment

The role of the political system is to integrate the society
Influences how business is conducted
Political process functions
Interest articulation
Interest aggregationthe collection of interests in the
political system
Policy making
Policy implementation and adjudication
MNE management
Lobbies governments on policies that affect business
Avoid appearances of inappropriate influence on the law

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Basic Political Ideologies

Political ideologya body of constructs, theories, and aims that
constitute a sociopolitical program
Pluralist societydifferent ideologies coexist because
there is no one ideology accepted by all
difficult to understand the political environment in a
pluralist society
Ultimate test of any political system is its ability to hold a
society together despite pressures from different
ideologies
Ideologies also help bring countries together
The impact of ideological differences on national boundaries
Differences in political ideology have affected boundaries
in Europe
When operating in a foreign country, must understand
the potential sources of political tension and instability

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The Political Spectrum

Aut
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Co
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Nondemocratic
Government

Totalitarianism

era
Lib

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Democratic
Government

Democracy

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A Political Spectrum
Democracyinvolves wide participation by citizens in the
decision-making process
Freedom of opinion, expression, press, and freedom to
organize
Election of political representatives
Limited term of elected officials
Independent and fair court system
Nonpolitical bureaucracy and defense infrastructure
Accessibility to the decision-making process
Democratic governments differ
Presidential versus parliamentary
Number of important political parties
Amount of citizen participation in decision making
Fragility and stability of new democracies
Democracy believed to be the best form of government

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Comparative Measures of Freedom

Free

Partly Free

Totalitarianism

Democracy

Political Rights

Not Free

Civil Liberties

1981
Free
Partly Free
Not Free

35.9%
38.9
20.0

1990
21.6%
21.6
40.0

1998
40.0%
26.5
33.5
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A Political Spectrum (cont.)

Totalitarianisma single party, individual, or group of
individuals monopolizes political power
Neither recognizes nor permits opposition
Theocraticreligious leaders are political leaders
Seculargovernment often imposes order through
military power
Totalitarianism takes several forms
Fascismdesires to control peoples minds and souls,
converting them to its own faith
Authoritarianismdesires to control the people
Communismpolitical and economic systems are
virtually inseparable
equal distribution of wealth
government ownership and control of resources

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Impact of the Political System on Management

Decisions
Political Riskcaused by political instability
Promotes fear that operating position will deteriorate
Tends to be higher in totalitarian regimes
Causes of political risk
Change in the opinions of political leadership
Civil disorder stemming from economic conditions,
human rights violations, or group animosity
External relationsanimosity between host country and
foreign investors country
Types of political risk
Micropolitical actions are aimed at specific foreign
investments
Macropolitical actions affect a broad spectrum of
foreign investors

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Government Intervention in the Economy

Individualistic paradigm
Belief in minimal government intervention in the
economy
Likely to be democratic and economically free
Promotes marketplace competition
regulates marketplace when competition by itself is
unreliable or unacceptable
Communitarian paradigm
Government tends to be prestigious
thrives on a respected, centralized bureaucracy
May be democratic or authoritarian
stable political party or coalition in power
Government may start partnership with business
Government action toward business is not always consistent

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Formulating and Implementing Political Strategies

Establishing a political strategy in the host country
Identify the issue
Define the political aspect of the issue
Assess the potential political action of other companies
and special-interest groups
Identify important institutions and key people
Formulate strategies
Determine the impact of implementation
Select the most appropriate strategy and implement
Implementing a strategymarshal whatever resources
necessary to accomplish the companys goals
Lobbyists educate and persuade government decision
makers
Enlist support of consumers

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Kinds of Legal Systems

Common lawbased on tradition, precedent, custom, and
usage
Interpretation by the courts
Civil lawcodified legal system
Based on a detailed set of laws that make up a code
Rules for business transaction included
Based on how the law is applied to the facts
Theocratic lawbased on religious precepts
e.g., Islamic law
has remained frozen
moral rather than commercial law
intended to govern all aspects of life
Consumer safeguardsdiffer in different legal systems
Deal with product liability issues

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The Legal Profession

Lawyers and their firms
Vary among countries in terms of how they practice law
and serve clients
Most firms are quite small
Firms have expanded abroad in order to serve their
clients
large legal firms often created through mergers or
correspondent relationships with firms in other
countries
Legal staffs have to understand local laws and practices

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Legal Issues in International Business

Affect many aspects of IB
National laws
May affect both domestic and foreign companies
operating within the countrys borders
health and safety standards
employment practices
antitrust prohibitions
contractual relationships
environmental practices
patents and trademarks
May govern cross-border activities
investment of capital
payment of dividends to foreign investors
customs and duties on imports

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