The Cultural , Political, and Legal Environments

Reading List

• John D. Daniels, Lee H. Radebaugh, Daniel P. Sullivan, Reid W. Click (2022). INTERNATIONAL
BUSINESS Environments & Operations, 17th EDITION, Pearson, Chapters 2-3
• Czinkota, M. R., Ronkainen, I. A., & Moffett, M.H. (2011). International business. 8 th Edition, John
Wiley, Chapters 5-6
Cultural Factors Affecting IB
Operations
FIGURE 1 Cultural Factors Affecting IB Operations
National Cultures As a Point of Reference

• Culture can be useful reference point

• National culture
• The nation as cultural mediator
Culture is elusive to study, partly because people belong to multiple cultures based on their
nationality, ethnicity, religion, gender, work organization, profession, age, and income level.
While we emphasize national culture, we also discuss how major cultural memberships differ
among countries.
The nation is a useful definition of society because similarity among people is a cause and an
effect of national boundaries and it is a reference people make to “we” versus “they”.
The shared values, attitudes, and beliefs of a group of individuals constitutes a culture.
While culture can be a useful reference point to determining values and attitudes, it isn’t
always accurate. Not everyone therein shares the same values and attitudes. Some people are
bicultural or multicultural - meaning that they have internalized more than one national
culture.
Subcultures exist within nations. cultural similarities link groups from different countries.
Groups can hold more similar attitudes with like-groups abroad than with dissimilar groups
in their own countries. As a consequence, when comparing nations culturally, one must be
careful to examine relevant groups—differentiating between, say, the typical attitudes of
rural and urban dwellers, or between managers and production workers.
The People Factor
• Cultural diversity
• Cultural collision
• Deal-focus culture (DF)
• Relationship-focus culture (RF)
International Trade and Business Operations involve people from different
national cultures, which affects every business function—managing a
workforce, marketing and transporting output, purchasing supplies, dealing
with regulators, and securing funds.

Cultural diversity can be a competitive advantage, but managing it can be

difficult. Sometimes issues can happen because cultures may have
different values. When contact among divergent cultures creates problems,
the situation is known as cultural collision. Cultural collision may cause
ineffective business practices and personal distress. A deal-focus (DF)
culture refers to one where people are primarily task-oriented as opposed to
a relationship-focus (RF) culture.
Influences on Cultural Formation and Change

• Sources of Change

• Change by choice

• Change by imposition
Developmental psychologists believe that most people acquire their basic
value systems, especially core values, as children. While these are set early
in life, they may change through choice or imposition.

Change by choice may occur because social and economic situations

present people with new alternatives. Change by imposition (sometimes
called cultural imperialism) refers to imposing certain elements from an
alien culture, such as a forced change in laws by a dominant country that,
over time, becomes part of the subject culture. Generally, contact among
countries brings change, known as cultural diffusion. When the change
results in mixing cultures, we have creolization.
Influences on Cultural Formation and
Change
• Language as both diffuser and stabilizer of culture
• Common language is a unifying force
• Multiple language groups
• Why English travels so well
• The evolvement of language
• Religion as a cultural stabilizer
Language is probably the most noticeable aspect of culture because it limits contact among
people who can’t communicate with each other. Language is at the heart of social identity.
Common language fosters a sense of shared identity.
Although a nation may have a single official language, the reality is much more complex,
that is, a nation may have many dialects. Further, many people are bilingual or multilingual.
English has become the “international language of business” for a number of reasons.

Native English language countries account for so much of world production and it is the
world’s most important second language. But it may lose some relative importance in the
future and it may lead to overvaluing employees with English competence. Languages add
and delete words. Over time, if groups of people become sufficiently isolated from each
other, a common language may evolve into more than one. At the same time, languages
coexist and influence each other. This cross-pollination of languages is an ongoing
phenomenon that coincides with the diffusion of cultures.

Many strong values are the result of a dominant religion. Centuries of religious influence
continue to shape cultural values even in those societies where the practice of religion has
been declining.
Major Groups Related to International
Trade

• Social stratification

• Individual qualifications and their limitations

• Ethnic and racial groups

• Gender-based groups

• Age-based groups

• Family-based groups
Every culture ranks people. Such social stratification creates hierarchies
and influences a person’s class, status, and financial rewards within that
culture. Social stratification is determined by individuals’ achievements
and talents (meritocracy) and their group identifications.

In most societies, meritocracy is important in business. However, this is

not always the case. Because societies, value group affiliations differently,
business practices differ among countries. There are many ways to classify
people’s group memberships. Those usually determined by birth are
ascribed group memberships, including gender, family, age, caste, and
ethnic, racial, or national origin. Acquired group memberships include
those based on religion, political affiliation, educational place and
achievement, and profession.
• Country-by country attitudes vary toward social connections, race and ethnicity, male
and female roles, rules and expectations based on age, and family ties. Country-
specific differences in equality and attitudes toward gender are sometimes quite
pronounced. Most countries have some laws hindering women’s ability to work.
Although many of these laws are intended to protect women, the results are sometimes
discriminatory. In many places, however, gender barriers in employment practices are
coming down because of changes in attitudes and work requirements. All countries
enforce age-related laws. Sometimes the logic of these laws seems paradoxical.
• National differences toward employment age are substantial. In some cultures, family
is the most important group. A person’s position in society depends heavily on the
family’s social status rather than on individual achievement. When family ties are
strong, small family-run businesses are quite successful; however, they often
encounter growth difficulties because owners are reluctant to share responsibility with
technically competent professional managers hired from outside the family. When its
business culture is thus hampered, a country may lack sufficient numbers of
indigenously owned large-scale companies that are usually necessary for long-term
economic development.
Major Behavioural Practices Affecting
Business
• Relationship preferences
• Power distance
• Individualism versus collectivism
• Risk-taking behavior
• Uncertainty avoidance
• Trust
• Future orientation
• Fatalism
We also examine some of the values underlying differences in behavior.

Power distance is a measurement of employee preferences of interaction between

superiors and subordinates. With high power distance, people prefer little
consultation between bosses and subordinates. They also prefer management styles
that are either autocratic (ruling with unlimited authority) or paternalistic (regulating
subordinate conduct by supplying their needs). With low power distance, they prefer
“consultative” styles.

High individualism describes a preference to fulfill leisure time, build friendships,

and improve skills independently of the organization. People with high individualism
also prefer to receive direct monetary compensation as opposed to fringe benefits,
and they prefer to engage in personal decision-making and on-the-job challenges.
High collectivism, in contrast, typifies an employee’s penchant for dependence on the
organization through training, satisfactory workplace conditions, and good benefits.
• Cultures differ in people’s satisfaction with the status quo versus taking risks to change
situations. We examine risk-taking behavior that reflects these attitudes: uncertainty
avoidance, trust, future orientation, and fatalism. Uncertainty avoidance describes a
trait of being uncomfortable with ambiguity. Where this trait is strong, most employees
prefer to follow set rules even if they believe that breaking them may be in the
company’s best interests. They also tend to stay with current employers for a long time
• Where trust is high, business costs tend to be lower because managers pend less time
fussing over every possible contingency and noncompliance, thus giving them more
time to produce, sell, and innovate. At the same time, people’s trust may differ toward
their in-group and others.
• A future orientation denotes a willingness to delay gratification in order to reap more in
the future. Fatalism If people are fatalistic (believing that events are predetermined and
inevitable), they’re less likely to accept the basic cause-and-effect relationship between
work and reward. Thus, managers are less apt to sway them with cause-and-effect logic
than by making personal appeals or by offering rewards for complying with requests.
Major Behavioural Practices Affecting
Business
• Information and task processing
• Perception of cues
• Low and high context cultures
• Information processing
• Monochromic and polychromic cultures
• Idealism vs. Pragmatic
• There are also differences in the way in which people perceive, obtain,
and process information.

As a rule, we selectively perceive cues—features that inform us about the

nature of something. We may identify things through any of our senses, and
each sense can provide information in various ways, such as seeing color,
depth, and shape through vision.

Low-context cultures are ones where people generally regard as relevant

only firsthand information that bears directly on the subject at hand.
Businesspeople will spend little time on small talk and tend to get to the
point. In high-context cultures, people tend to understand and regard
indirect information as pertinent.
All cultures process information inasmuch as they categorize, plan, and quantify.
However, every culture has its own systems for ordering and classifying
information.

In monochromic cultures people normally prefer to work sequentially, such as

finishing transactions with one customer before dealing with another.
Conversely, polychromic people are more comfortable when working
simultaneously on a variety of tasks (multitasking).

Some cultures tend to focus first on the whole and then on the parts; others do
the opposite. Similarly, some cultures prefer to establish overall principles before
they try to resolve small issues—an approach sometimes labeled idealism.
Cultures in which people focus more on details than on abstract principles are
said to be pragmatic.
Problems in Communicating Across
Cultures

• Translation of spoken and written language

• Silent language
• Colours
• Distance
• Time and punctuality
• Body language
• Prestige
Translating one language into another is not as straightforward as it may
seem. Some words simply don’t have direct translations. And language is
constantly evolving. In any language, words mean different things in
contexts. Grammar is complex and the seemingly slight misuse of a word
can substantially change the meaning. A word of caution is to be careful
with humor because it sometimes lacks universal appeal. Finally, even
when all parties to a communication come from countries that share an
official language, don’t assume that understanding will go smoothly.
• We constantly exchange messages through a host of non-spoken and non-written cues that
form a silent language. For a product to succeed, its colors must coincide with consumers’
frame of reference. Colours invoke distinct connotations in different countries, such as
being lucky or unlucky or being associated with a specific business. Comfortable
distances among people vary. In the United States people tend to maintain larger distances
during conversations or when conducting business than people in Mexico do. And except
for handshakes, there is little or no touching in the United States, whereas touching one
another in Mexico is quite common.
• Different perceptions of time and punctuality also may create confusion. U.S.
businesspeople usually arrive before a business appointment time, a few minutes late for
dinner at someone’s home, and a bit later still for large social gatherings. In another
country, the concept of punctuality in any or all of these situations may be different. Body
language, or kinesics, is the way people walk, touch, and move their bodies. Very few have
universal meanings. Another factor in silent language relates to a person’s status,
particularly in an organizational setting. U.S. managers typically place great faith in
physical things as cues to prestige and may underestimate the status of foreign counterparts
who lack large, plush corner offices on high floors. Foreigners may underestimate U.S.
counterparts who perform their own services, such as opening doors, fetching coffee, and
answering unscreened phone calls.
Guidelines for Cultural Adjustment

• Host society acceptance

• Degrees of cultural differences
• Cultural distance
• Hidden cultural attitudes
• Ability to adjust
• Company and management orientations
• Polycentrism
• Ethnocentrism
• Geocentrism
After managers identify key cultural differences abroad, must they alter their customary
practices to succeed there? Can people overcome culturally related adjustment problems
when working abroad? We explore four issues that affect degrees of successful adjustment.

• Host countries do not always expect foreigners to adjust to them.

• When a company moves into a culturally close foreign country, it should encounter fewer
cultural adjustments than when entering a culturally distant country. Even among
culturally close countries, however, differences could still undermine business dealings.
Even if the home and host countries have seemingly similar cultures, people in the host
country may reject the influx of foreign practices because they see them as additional steps
that threaten their self-identities.
• When individuals go abroad, they encounter different customs and practices. Some of
these may be potentially traumatic to them. Even in countries whose practices aren’t’
necessarily traumatic to them, workers who go abroad often encounter culture shock —the
frustration that results from having to absorb a vast array of new cultural cues and
expectations. Fortunately for most people, culture shock begins to ebb after a month or
two as they grow more comfortable. Some people experience reverse culture shock when
they return, having become partial to aspects of life abroad that are not options back home.
• Whether and how a company and its managers adapt abroad depends not
only on the host-country culture but also on their own attitudes and
behaviors. A polycentric organization believes it should act abroad like
companies there. Ethnocentrism reflects the conviction that one’s own
practices are superior to those of other countries. Between the extremes
of polycentrism and ethnocentrism, geocentrism integrates home- and
host-country practices as well as introducing some entirely new ones.
Politics, Laws, and Operating
Internationally (1 of 2)
Map 1 Map of Political Risk, 2019

Source: Marsh, Political Risk Index Map 2019; .

https://www.marsh.com/us/campaigns/p
Politics, Laws, and Operating Internationally (2 of
2)
Figure 2 Political and Legal Factors Influencing ITBO Operations
The Political Environment

• Individualism
• Collectivism
• Political ideology
• Democracy
• Totalitarianism
Political Ideology
Figure 3 The Political Ideology Spectrum
Democracy
Table 1 Prominent Types of Democracies
Form Profile Examples

Multiparty System whereby three or more parties govern, either Canada, Germany, Italy,
separately or as part of a coalition. One party negotiates Israel, Mexico
with opposition parties to legislate policy.
Parliamentary Citizens exercise political power by electing Australia, India, New
representatives to a legislative branch, the Parliament. It is Zealand, United Kingdom
the basis of legitimacy for the various ministers who then
direct the executive branch.
Representative Originates in a constitution that protects individual Japan, United States
freedoms and liberties. The law treats all citizens equally.
Elected representatives, while ultimately autonomous, act
in the people’s interest. Officials represent voters and,
while mindful of voters’ preferences, have the authority to
act as they see fit.
Social Applies democratic means to transition from capitalism to Denmark, Finland,
socialism. The government promotes egalitarianism while Norway, Sweden
also regulating capitalism’s tendency toward
opportunism.
Totalitarianism
Table 2 Prominent Types of Totalitarianism
Form Profile Examples

Authoritarian Tolerates no deviation from state ideology. Day-to-day life reflects Kazakhstan, North Korea, Chad,
submission to state authority; resistance incurs punishment. Officials and Turkmenistan
control politics, but pay less attention to the economic and social
structure of society.
Fascist Advocates a single-party state that controls, through force and Italy, Germany, Japan, circa
indoctrination, people’s minds, souls, and daily existence. Calls for the 1920s–1945
merger of state and corporate power to standardize values and
systems. There have been few fascist political systems; nearly all
prevailed during World War II.
Secular A single party controls elections, tolerates dissent if it does not China, Vietnam, Rwanda,
challenge the state, and suppresses other ideologies. The state does not Russia, and Venezuela
prescribe a grand, all-encompassing vision. It grants an individual
some economic and civil freedoms provided one does not contest state
authority or disrupt social harmony.
Theocratic Government is an expression of the favored deity. Leaders profess to Iran, Afghanistan, and Saudi
represent its interests on earth. The State applies ancient dogma in Arabia
place of modern principles. Strict social regulation and gender
regimentation typically prevails.
The State of Freedom (1 of 2)

Map 2 The Distribution of Political Freedom

Source: Freedom House, “Freedom in the World, 2019 Map.” Used by permission of
Freedom House.
A "free” country exhibits open political competition, respect for civil liberties, independent civic
life, and independent media. There are inalienable freedoms of expression, assembly, association,
education, and religion. Examples include Australia, Brazil, India, and the United States.

A “partly free” country exhibits limited political rights and civil liberties, corruption, weak rule
of law, ethnic and religious strife, unfair elections, and censorship. Often, democracy is a
convenient slogan for the single party that dominates within a façade of regulated pluralism.
Examples include Guatemala, Pakistan, and Tanzania.

A “not free” country has few to no political rights and civil liberties. The government allows
minimal to no exercise of personal choice, relies on the rule of man as the basis of law, constrains
religious and social freedoms, and controls a large share, if not all, of business activity. Examples
include China, Russia, Saudi Arabia, and Iran.

Most people in the world live in various forms of authoritarian political systems.
The State of Freedom (2 of 2)
• The prevalence of political freedom
• Third Wave of Democratization
• Freedom struggles
 Freedom Struggles
Fig 4 Freedom in the World: Gains and Declines by Country

Source: “Freedom in the World 2019: Democracy in Retreat,”

www.freedomhouse.o
rg.
The Distribution of Democracy (1 of 2)
Table 3 The Texture of Democracy: Types, Characteristics, and
Examples

Type Characteristics46 Examples

Full • Mature political culture promotes and protects political Australia, Austria, Costa
Democracy freedoms and civil liberties. Rica, Denmark, New
• Government discharges responsibilities transparently. Zealand, Norway,
• An effective system of checks and balances regulates Switzerland, Uruguay
politics.
• The judiciary is independent, its decisions are impartially
enforced, and the rule of law predominates.
• Media are independent, vigilant, and diverse.
Flawed • The State respects basic civil liberties. Brazil, Estonia, Hungary,
Democracy • Free and fair elections regularly occur but experience fraud India, Indonesia, Mexico,
or media restrictions. Senegal, Singapore,
• Governance problems and low political participation make South Africa, South
for a weak political culture. Korea, United States,
• Leadership and policy change occur frequently. Taiwan
The Distribution of Democracy (2 of 2)
Table 3 The Texture of Democracy: Types, Characteristics, and
Examples
Type Characteristics46 Examples
Hybrid • Electoral irregularities undermine freedom and justice. Bangladesh, Cambodia,
Regime • The state limits opposition parties and candidates. Honduras, Kyrgyzstan,
• Judicial bias favouring the “man” undermines the rule of law. Nigeria, Pakistan,
• Political culture, public administration, and political participation Tanzania, Thailand,
struggles. Ukraine
• Corruption is extensive, civil society fades, and media are regulated.

Authoritarian • Political pluralism is absent or repressed by the state. Afghanistan, Belarus,

Regime • Democratic institutions may exist but the state uses them to China, Gabon, Kuwait,
legitimate single-party rule. Nicaragua, Mozambique,
• Elections, if they do occur, are neither free nor fair. Russia, Saudi Arabia,
• The state systematically disregards civil liberties. Zimbabwe
• There is no independent judiciary and the rule of man predominates.
• Media are typically state-owned or controlled by groups connected to
the state.
• Censorship suppresses criticism of the state.
• Propaganda promotes the state ideology.
The Allure of Authoritarianism

• Political economy of growth

• Rhetoric versus reality
• Economic problems
• Who defines democracy?
Political Risk

• What is political risk?

• Systematic
• Procedural
• Distributive
• Catastrophic
No matter whether it operates in Canada, Cambodia, Cameroon, or Chad, for instance,
an MNE faces the risk that the political events in the host country will adversely affect
its operational objectives, strategic goals, and profitability.

Political risk is the chance that political decisions, events, or conditions change a
country’s business environment in ways that force a company to accept lower rates of
return, cost it some or all its investment, or threaten the sustainability of their operation.
Various trends increase political risk. Declining political freedom
destabilizes the play of politics across markets. Many countries lack
the texture of democracy to sustain consistent governance.
Compounding problems is the fact that many emerging markets are
rife with flashpoints.
Operationally, foreign investors often compete with state-run rivals
whose political allegiance complicate economic situations;
government favoritism for homegrown champions makes for risky
situations. More fundamentally, arbitrary laws, fragile institutions,
volatile societies, and corrupt regimes fuel uncertainty.
Complicating matters is the fact that political risks triggers differ from
market to market. Consequently, political analytics that work in one
country often travel poorly to others.
 Systematic
•
These are risks associated with the macro-economic policies of a country. Structural
and policy changes impact business, both positively and negatively. Typically, with the
change of governments, policies change based on their election manifesto. However,
there are specific commitments given to IMF & WTO. It is essential to study these
commitments as they are not amenable to change in most cases unless negotiated
through consensus.
 Procedural
•
Trade is linked to local procedures in a supply chain. It is vital to study the parameters
of country-of-origin labels, standards, and customs rules. Non-tariff barriers and their
coding are tricky. Sourcing can also be restricted based on country of origin. Local
value adds and proportion may also be a matter of complications. Corrupt practices can
cause administrative delays. In some cases, administrative delays would be purposeful.
 Distributive
•
Profit-sharing with local partners and repatriation of funds get restricted in this risk.
Governments use their power to dilute profits earned by an MNE. The aspect of
creeping expropriation in this risk involves a continual restriction of private property
rights gradually over time through regulation, legislation, and taxation, making it
difficult for businesses to own property.
 Catastrophic
•
hese risks disrupt society through civil wars, ethnic discord, illegitimate regimes, an
act of war, and terrorism, to name a few.
Classifying Political Risk
Figure 5 Classes and Characteristics of Political Risk
The Legal Environment

• What is the legal system?

• Components of a legal system
• Constitutional law
• Criminal law
• Civil and commercial law
 Types of Legal Systems (1 of 2)
Map 5 The Wide World of Legal Systems

Source: University of Ottawa, “World Legal Systems,”

www.juriglobe.ca/eng/index.
A country’s legal system regulates the conduct of business transactions, the rights and
The globalization of business, especially expanding cross-national contact, communic
• A common law system relies on tradition, judge-made precedent, and
usage. It respects established case law in resolving disputes. A civil law
system relies on the systematic codification of accessible, detailed laws. It
assigns political officials, rather than government-employed judges, the
responsibility to translate legal principles into a compendium of
regulatory statutes.
• A theocratic law system relies on religious doctrine, precepts, and beliefs.
A customary law system reflects the wisdom of daily experience or, more
formally, enduring spiritual legacies and time-honored philosophical
outlooks. A mixed legal system results when a nation uses two or more of
the preceding types.
The Context of Legality
• The Context
• The rule of man
• The rule of law
• The basis of rule: legacies & trends
• Implication to managers
In general, legality is that which makes something legal or, for that matter,
illegal; to wit, “no crime exists if an action is not a crime in that specific
jurisdiction.” The context of legality creates confidence or, if absent, fans
anxieties, in the legal system. If legitimately established, the legal system gives
managers confidence in the sanctity of property rights, quality of contract
enforcement, integrity of the police, fairness of the courts, and protection from
crime and violence. Hence, legal environments marked by accountability,
transparency, legitimacy, and justice, all of which constitute the context of
legality, inspire different choices, and elicit different consequences than those
environments marred by uncertainty, arbitrariness, and illegitimacy.

The rule of law holds that no one, whether a public official or private citizen, is above
the law. Besides instituting a just political environment, the rule of law
guarantees the enforceability of commercial contracts, business transactions,
and the sanctity of property rights. Companies relay on its legitimacy to validate
the laws, codes, and statutes that regulate their activities.
The rule of man holds that ultimate authority resides in a person whose word and whim,
no matter how unfair or unjust, is law. Nations that set the basis of rule in terms of the
rule of man institute a legal system where the sovereign leader creates the law, officials
are obedient agents, and citizens are powerless subjects. The law is an apparatus of the
state, used to suppress threats to, and reward support for, its authority. In countries
where the rule of man is the basis of law, acceptable marketplace behavior is
unpredictable.

History shows that as countries moved from agrarian to industrial economies,

increasingly prosperous citizens called for laws to protect their increasingly vital
property rights. Sustaining economic development, as well as protecting growing
wealth, required a legal system not under the direction of the “man,” but based on just,
fair, and transparent laws. Therefore, extrapolating from history, the shift from
agrarianism to industrialism in emerging economies, goes the reasoning, should see
countries following precedent and moving from the rule of man to the rule of law.
Contemporary developments complicate predictions. Democracy’s ongoing decline has slowed the
diffusion of the rule of law. Whereas the rule of law is the cornerstone of democracy, the rule of man
is the cornerstone of authoritarianism. Fading freedom and struggling democracy relieve pressure
on the “man” on institute the rule of law. Different philosophical legacies in different nations
moderate the preferred basis of rule. The growing confidence of emerging economies increasingly
questions the presumption that “the West knows best”.

Operating in different markets with different conceptions of legality requires assessing the foundation of
legality to understand how local officials will regulate activities. Uncertainty about the basis of rule and
the goals of government throughout much of the world creates risky legal environments. As
authoritarianism surges and democracy retreats, the basis of rule moves from the law to the man.
Certainly, as had long been the case, Western companies could opt to bypass these sorts of legally risky
markets. Throughout the 20th century, this was a reasonable option. Western markets provided ample
opportunities for productive, profitable activity. Generally, markets that practiced the rule of man were on
the periphery of the global economy, typically providing raw materials or low-cost labor. For Western
MNEs, the basis of rule was important, but not decisive, and managers had various means to deflect the
arbitrariness of the “man.” Currently, as seen in fading freedom and democracy’s retreat,
authoritarianism and its instrumentality, the rule of man, influence IB.
Legal Issues Facing International
Companies

• The legality of business practices

• The legality of business strategies
•The globalization of markets progressively standardizes many
aspects of the legal environment. Countries intent on attracting
foreign investment develop consistent politics to build attractive
markets. Despite convergence, different countries regulate
business activity differently. New forms of business activity along
with changing patterns of trade and investment create legal
uncertainties. Consequently, managers adjust operations and
strategies to obey local laws.

•The legal system moderates practical aspects of business

operations, including how managers start a business, enter and
enforce contracts, hire and fire workers, and close a business.
• The legal system moderates strategic aspects of business operations, including
product origin and local content, marketplace behavior, legal jurisdiction, product
safety and liability, and intellectual property protection. National laws affect the flow
of products across borders. Host governments set laws that regulate access based on
the product’s country of origin.
• To spur reluctant companies, governments enforce local content regulations.
Countries impose product-safety and liability laws that require an MNE adapt
a product or else forsake market access. As a rule, wealthier countries impose
stringent standards, whereas poorer countries, reflecting developing legal
codes and rule of man legacies, inconsistently apply broader regulations. IB
transactions, by definition, cross national borders. In the event of a dispute,
determining which country’s legal system takes precedence is the matter of
legal jurisdiction.
• MNEs specify a choice-of-law clause in contracts that stipulates
whose laws, when necessary, govern dispute resolution. Similarly,
contracts usually include arbitration provisions, whereby companies
agree to resolve potential disputes outside of court through agencies
such as the International Court of Arbitration.
• In Adam Smith’s time, countries drew strength from their agricultural
prowess. Later, smokestack industries defined a nation’s prosperity
and power. Now, countries look to their brainpower to create might,
prestige, and wealth. We call this output intellectual property (IP)—the
creative ideas, proprietary works, innovative expertise, or intangible
insights, often in the form of inventions, literary and artistic works,
symbols, names, images, designs, or processes, that create a
competitive advantage for an individual, company, or country. The
rising power of ideas in the global economy has made protecting IP a
growing concern.
Types of Legal Systems (2 of 2)

Table 4 Easy Here, Hard There: Doing Business In Various Countries

Country Ranking Country Ranking
New Zealand 1 Timor-Leste 181
Singapore 2 Chad 182
Hong Kong SAR, China 3 Congo, Dem. Rep 183
Denmark 4 Central African Republic 184
South Korea 5 South Sudan 185
United States 6 Libya 186
Georgia 7 Yemen 187
United Kingdom 8 Venezuela 188
Norway 9 Eritrea 189
Sweden 10 Somalia 190

Source: Doing Business 2020. The World Bank.

https://www.doingbusiness.org/en/doingbusiness