The Political and Legal

Environments Facing Business

Chapter 3
Learning Objectives
3-1 Explain how politics and laws influence business
3-2 Appraise the principles and practices of the political
environment
3-3 Discuss the contemporary state of political freedom
3-4 Interpret political risk
3-5 Appraise the principles and practices of the legal
environment
3-6 Describe key legal issues facing international companies
3-7 Relate the ideas of politics, law, and the business
environment
Political and Legal Forces
Objective 3-1
Figure 3.1 Political and Legal Factors Influencing IB Operations
Political Risk Map
Objective 3-2
Map 3.1 Map of Political Risk, 2022

Source: AON Political Risk, https://www.riskmaps.aon.co.uk/PoliticalRisk/Map

Political Definitions
Objective 3-2
• Political System
• Political Freedom
• Individualism
• Collectivism
Political Definitions
Objective 3-2
• Political System
– Structural dimensions and power dynamics of the government that
 specify institutions, organizations, and interest groups, and
 define the norms and rules that govern political activities.
 The mission of a political system is clear-cut: integrate different
groups into a functioning, self-governing society.
Political Definitions
Objective 3-2
• Political Freedom
– the degree to which fair and competitive elections occur,
– the extent to which individual and group freedoms are guaranteed,
– the legitimacy ascribed to the rule of law, and
– the existence of freedom of expression.
– In a democracy, MNEs have the freedom to invest and operate
based on economic, not political, standards.
– Managers and consumers are free to do as they see fit in a
business environment that promotes commerce and encourages
trade. The signaling devices of market activities, not bureaucratic
regulation, organize resource flows
Political Definitions
Objective 3-2
• Individualism
– The doctrine of individualism emphasizes the primacy of individual
freedom, self-expression, and personal independence (think of the
stipulation in the U.S. Declaration of Independence that we all
have “certain inalienable Rights, that among these are Life, Liberty
and the pursuit of Happiness”)

• Collectivism
– The doctrine of collectivism emphasizes the primacy of the
collective (e.g., a group, party, community, class, society, or
nation) over the interests of the individual. No matter the
importance of those who compose it, the whole of the collective
trumps the sum of its individual parts.
The Political Spectrum
Objective 3-2
Figure 3.2 The Political Spectrum
Types of Governments
Objective 3-2
• Democracy
– all citizens are politically equal, entitled to freedom of thought,
opinion, belief, speech, and association, and command sovereign
power over public officials

• Totalitarian
– subordinates the interests of the individual to that of the collective.
An agent in whatever form, such as an individual, a committee, an
assembly, a junta, or a party, monopolizes political power and
uses it to regulate many, if not all, aspects of public and private life
Democracy vs. Totalitarian
Objective 3-2
Table 3.1 Prominent Types of Democracies

Table 3.2 Prominent Types of Totalitarianism

The State of Political Freedom
Objective 3-3
Map 3.2 Map of Freedom

Source: Freedom House, “Map of Freedom 2023,” at https://freedomhouse.org/explore-the-map?type=fiw&year=2023

Used by permission of Freedom House.
Change in the State of Political Freedom
Objective 3-3
• More Democracy worldwide
– The second half of the twentieth century saw the steady diffusion of
democracy worldwide.
– Between 1950 and 2022, the number of electoral democracies grew from
22 to 126 countries.
– Many had been totalitarian states of some form, but had begun
developing democratic governance
– “Third Wave of Democratization”
Current Political Systems
Objective 3-3
Table 3.3 Types and Characteristics of Political Systems in the World
Change in the State of Political Freedom
Objective 3-3
• What is political risk?
– the risk that political decisions, events, or conditions change a
country’s business environment of the value of their
investment, or threaten the sustainability of their operation

• Why discuss political risk?

– No matter whether it operates in Canada, Cambodia,
Cameroon, or Chad, for instance,
Types of Political Risk
Objective 3-4
Figure 3.4 Classes and Characteristics of Political Risk
Legal Systems and Components
Objective 3-5
• What is the legal System?
– the mechanism for conceiving, stipulating, interpreting, and enforcing the laws
in a formal jurisdiction

• Components of a legal System

– Constitutional law
 translates the country’s constitution into an open and just legal
system, setting the framework for government and defining the
authority and procedure of political bodies to establish laws
– Criminal law
 safeguards society by specifying what conduct is criminal, and
prescribing punishment to those who breach those standards
– Civil and commercial law
 ensure fairness and efficiency in business transactions by
stipulating private rights and specific remedies in order to
regulate conduct between individuals and/or organizations.
Types of Legal Systems
Objective 3-5
Map 3.4 The Wide World of Legal Systems

Source: University of Ottawa, “World Legal Systems,” retrieved July 20, 2023, from http://www.juriglobe.ca/eng/index.php.
Used by permission.
The Basis of Rule
Objective 3-5

• Rule of man
– holds that ultimate authority resides in a
person whose word and whim, no matter
how unfair or unjust, is law
• Rule of law
– holds that no one, whether a public
official or private citizen, is above the law
Two Key Legal Concerns Facing IB
Objective 3-6

• Operational
• Strategic
Operational

• Operational concerns include:

• Process of starting a business involves
activities such as registering its name, adopting
the appropriate tax structure, obtaining licenses
and permits, arranging credit, and securing
insurance.
• Making and enforcing contracts.
• Hiring and firing rules.
• Ease of closing a business or going out of
business.
Strategic

• Strategic concerns include:

• Product regulation laws.
• Product safety laws.
• Legal jurisdiction.
• Intellectual property.
Ranking of Doing Business in Various Countries
Objective 3-7 https://www.doingbusiness.org/en/rankings

Table 3.5 Easy Here, Hard There: Doing Business In Various Countries

Source: Doing Business 2020. The World Bank. Retrieved July 20, 2023.