Chapter 5

To learn how differing types of political system function, in terms

of governmental processes, societies and business interactions.
To gain a critical appreciation of democracy’s progress in
differing national environments.
To assess political risk, both internally and internationally.
To appreciate the nature and significance of diverse national
legal systems, as well as their interactions
with both regional and international legal frame-
works
To assess legal risk for international
managers, including both national and
international implications.
 Aims of the lecture
• To learn how differing types of political system
function, in terms of governmental processes,
societies and business interactions.
• To gain a critical appreciation of democracy’s
progress in differing national environments.
• To assess political risk, both internally and
internationally.
• To appreciate the nature and significance of diverse
national legal systems, as well as their interactions
with both regional and international legal frameworks.
• To assess legal risk for international managers,
including both national and international implications.
Comparing political systems
Definition: structures and processes by which a nation-state
is governed.
Authoritarian government – concentration of power in an
individual or small group, often military or ideology-based.
Democratic government – system based on accountability
of governments to the people, through free elections.
Many political systems fall on a continuum between
democracy and authoritarianism:
– The market-oriented authoritarian or semi-
authoritarian system characterizes numerous
emerging economies, where the state guides
economic development.
 Degrees of democracy
States vary in democratic accountability,
participation and civil rights. Attributes of
democracy include:
– Free and fair elections, supported by media freedom
– The rule of law, including independent judiciary (though its
robustness varies between states)
– Civil society – the presence of freely-functioning voluntary
groups (including religious, political and labour) is a
substantive indicator of genuine pluralism.
Many transition economies are building
democratic institutions alongside
market structures; however, legacies of
authori-tarianism remain.
Features of authoritarianism and democracy
Authoritarian government rests on rule by a political elite that has power
for the time being. Such a regime usually holds on to the power by
suppressing dissent, often by force. Democratic governments tend to be
accountable to the people,
instead, by relying on free
Authoritarianism versus Democracy
and fair elections. The will
of the leadership thus domi- Power determines law;
Rule of law
Constitutional framework;
constitution on paper only equality before law
nates in an authoritarian
regime, whereas democracy Detention without charge; Right to a fair trial; no
few rights for accused;
relies on representative Imprisonment for Civil rights detention without charge;
torture prohibited
political dissent
institutions like the elected
legislatures. Restrictions on association,
Political
Right to vote and stand
expression and any activity for office; freedom of
contrary to the official line rights association and expression

Elections with little or no Regular elections; one per-

Elections son/one vote; monitoring for
choice of the candidates irregularities, intimidation

Courts are an administra- Court Independent judiciary;

tive arm of government system transparent process

Press controlled by the Freedom Editorial and reporting inde-

state; restricted reporting of the press pendent from government
From
authoritarian
to democratic:
selected
countries

Source: Kekic, L. (2006) ‘A

pause in democracy’s march’,
The Economist: The World in
2007 data,
www.theworldin.com
Branches of government
Executive – carries out government functions,
including finances, national security and social
welfare.
Legislative – law-making structures and processes;
in democracies, based on a national elected
assembly.
Judicial – through the court system, officials
administer justice and adjudicate in disputes for both
individuals and organizations.
Two constitutional principles underpin
relations between the three branches:
– Separation of powers – each is independent, but…
– Checks and balances prevent domination by one
branch.
 Parties and politics
Political activities in most countries are played out via
political parties, although they are typically restricted to
government-sponsored parties in authoritarian states.
In democratic societies, parties represent a range of
views:
– Conservative (on the ‘right’), socialist (on the ‘left’), nationalist,
religious and rural, among others.
– Centrist parties have greater widespread appeal to electorates.
In multiparty systems, a coalition government
(formed by two or more parties) is a solution,
but can be unstable.
Respect for
institutions in
Latin America
(2007)

Source: ‘A warning for reformers’, The Economist, 17 November 2007

 Political risk
Businesses value stability and predictability of government
policy in assessing location strengths and weaknesses.
Political risk can arise within a country or from external
sources.
An authoritarian regime may seem to be more stable than a
multiparty democratic one, but appearances can be
deceptive.
Factors which can destabilize a government (to which
authoritarian governments are particularly vulnerable)
include: corruption , personalized power
centres, factional infighting, institutional
power bases (such as the army).
Internal political
risks
Transparency
International’s
Corruption
Perception Index,
selected
countries,
2007

Note: 0 = highly corrupt, 10 = highly clean. Rankings appear in brackets

Source: Transparency International (2007) Corruption Perception Index,
www.transparency.org
International political risk
Insecurities in relations between countries create
uncertainties which affect international business.
Countries differ in their relative power – in economic,
political and military respects – and their businesses
often reflect these strengths (and weaknesses).
Regional and cross-border conflicts give rise to risk
in many parts of the world, especially affecting
operations in resource-rich countries.

In unstable locations and uncertain

environments, MNEs must assess
risks and work with stakeholders.
International risks
The role of governments
in economic activities
Traditional liberal market view is one of minimum
intervention, but recent financial crises have
prompted direct financial support by US and
European governments.
State-owned enterprises, especially in strategic
sectors (such as energy), are limbs of the
government.
State-controlled enterprises have varying ownership
structures – some are listed companies, although the
state is the majority shareholder.
State players are a growing force in the global
economy, notably China and resource-rich Middle
Eastern states.
 Business regulation
• Regulation can be advantageous for businesses, as in
government small-business initiatives, but is generally
perceived as burdensome and costly.
• A trend has been reduction in national regulation.
• Businesses may be attracted to countries with little
regulation, but the downside may be weak environmental
and safety regimes, as well as weak protection of
property.
• Competition law seeks to control anti-competitive and
unfair business practices:
– EU competition law targets abuse of a dominant
position in the relevant market.
Business regulation in selected countries
 Legal frameworks:
national to international
The national legal system provides the substantive law
and court structure which most directly affect businesses.

MNEs operating in different countries are subject to the

national law in each.
– Legal systems in democratic societies where the rule of
law prevails tend to be more transparent than those in
authoritarian countries.

Regional frameworks and international

law overlap with national law in several
spheres, such as environmental protection.
Dimensions
of the legal
environment
Legal risk internationally
Legal risk arises when a company needs to launch
legal action (such as to enforce a contract) or when it
must defend itself against legal action.
In FDI and outsourcing strategies, the MNE is involved
in webs of legal relations in foreign environments:
Contracts with suppliers, customers,
subcontractors
Liability under employment law and health & safety
law
Liability under environmental protection law
Liability for dangerous products
Liability for industrial accidents
Legal risks in overseas locations
Most numerous
types of litigation
in the US and UK
(2004)

Source: Financial
Times, 10 October 2005
Legal institutions in the EU
The Council of Ministers is the seat of executive authority.
The European Commission has both legislative and
executive powers, such as issuing regulations and
directives.
The European Parliament acts as a check on the other
institutions, but is not as influential as a national legislature.
EU institutional reforms focus on reducing unwieldy
structure, but face objections …
From those fearful of loss of national sovereignty
From those objecting to lack of democratic accountability.
 International law and
business implications
Inter-governmental co-operation has led to a
growing body of international law, in the form of
conventions and treaties.
There is a growing consensus internationally that in
some areas, such as human rights and the
environment, international law is setting the
standards.
For firms, compliance with international
standards, rather than weaker national laws, is
increasingly expected by stakeholders,
consonant with CSR strategy.
Ratification of major human rights conventions

Source: UNDP (2006) Human Development Report 2006 (Basingstoke: Palgrave Macmillan)
 Conclusions
In both operations and markets, national political
and legal systems are key aspects of the
environment for MNEs.
Both authoritarian and democratic systems – and
many in between – offer opportunities for
international business, but…
Political and legal risks arise in countries with authoritarian
regimes and weak rule of law.
Achieving corporate goals depends on managing these
risks.

The growing importance of international law

is concentrating the minds of decision-
makers in both governments and MNEs.