Chapter 3 The Political and Legal Environment Facing Business PDF

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Chapter 3 The Political and Legal Environment Facing Business Pages 57-91 Politics, Laws, and Operating Internationally    

Managers study political and legal environments in order to fit activities to local circumstances. Unstable political climate in Russia  businesses being shut down for the most random reasons o High political risk Politics and laws vary among the many markets that compose the global business environment. The interplay of political ideologies, conceptions of political freedom, legacies of legality, presumptions of fairness, and standards of accountability in each market makes for challenging business environments.

The Political Environment 

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Political system  the structural dimensions and power dynamics of the government that o specify institutions, organizations, and interest groups o define the norms and rules that govern political activities. The goal of the political system is integrating the diverse elements of a society. Its test is uniting society in the face of divisive viewpoints. Individualism o Individualism champions the primacy of the rights and role of the individual over the group.  Such as “life, liberty, and the pursuit of happiness” U.S. Constitution o Business implications:  every person has the right to make decisions free of onerous rules and regulations. o Laissez-faire  Government should not interfere in business affairs  Rather, the market operates according to the neoliberal principles of free market fundamentalism whereby people  regulate themselves in promoting economic prosperity  act fairly and justly to maximize personal performance without threatening the welfare of society. o Examples: Australia, Canada, the Netherlands, and the United States, Collectivism o 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. o Examples: Argentina, China, Vietnam, Japan, South Korea, Egypt, Brazil, Taiwan, and Mexico. o a common goal: make decisions and conduct activities that improve the welfare of the collective. o Extreme cases: Venezuela, Iran, or Saudi Arabia.

Political Ideology 

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A political ideology encapsulates the doctrine of political behavior and change. It outlines the procedures for converting ideas into actions.

Political Freedom is o the degree to which fair and competitive elections occur o the extent to which individual and group freedoms are guaranteed o the legitimacy ascribed to the rule of law o the existence of freedom of expression. Democracy o Democracy calls for participation by citizens in a fair and just decision-making process. o that all citizens are politically equal, entitled to freedom of thought, opinion, belief, speech, and association, and command sovereign power over public officials o Democracy and individualism are intrinsically related and mutually reinforcing  individualism legitimates principles of democracy  democracy supports standards of individualism. o Business Implications  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.

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o Totalitarianism o A totalitarian system subordinates the interests of the individual to that of the collective. o consolidates power in a single agent who then controls political, economic, and social activities. o A totalitarian government eliminates dissent through indoctrination, persecution, surveillance, propaganda, censorship, and violence. o It tolerates few, if any, ideas, interests, or activities that oppose state ideology. o

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2.6 billion people live under totalitarianism Business Implications  Totalitarianism and collectivism are intrinsically related and mutually reinforcing; collectivism legitimates principles of totalitarianism and totalitarianism supports standards of collectivism.  Authoritarian parties often rely on shadowy politics, skewed elections, and nefarious security agencies.

The State of Political Freedom 

Freedom house identifies three kinds of political systems

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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. Partly Free  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. Not Free  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.

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The Prevalence of Political Freedom 

Third Wave of Democratization o The second half of the twentieth century saw the steady diffusion of democracy worldwide. Between 1950 and 2014, the number of electoral democracies grew from 22 to 120 countries. Many had been totalitarian states of some form, but had begun developing democratic governance.

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Democratization, a global movement that expanded individual freedoms and civil liberties. 52 Societies began building just institutions, fair property rights, independent media, and impartial judiciaries. As a result, by 2000, nearly half the world’s population, more than at any time in history, lived in a democracy of some sort. Various forces powered past the Third Wave of Democratization  Failure of totalitarian regimes to deliver prosperity  Improving communication technology  Economic dividends of political freedom

The Struggles of Political Freedom  

Several indicators show slowing adoption of democracy throughout the world. The Economist Intelligence Unit identifies four types of political systems: o Full democracy o Flawed democracy o Hybrid regime o Authoritarian regime

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Worldwide, few people live in fully functional democracies; many more live in authoritarian states.

The Allure of Authoritarianism 

Powering the resurgence of Totalitarianism is o strong states support strong performance,

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o gaps in the principles and practices of democracy. o Economic insecurity following slowing growth, o escalating debate of the meaning of democracy. Political Economy of Growth o The modernization hypothesis holds that aspects of economic development—notably, industrialization, urbanization, education, health, and income—support democratic governance. o Case of India vs. China in prosperity and growth Rhetoric vs Reality o Democratic issues in western countries  the less-developed nations are uninspired to adapt such a model o Confidence in institutions has declined throughout the West. Fewer than one in five West Europeans trust political parties, while only one in three regards governments and parliaments as trustworthy. o 8% Americans, versus 40 percent in 1987, report “a great deal” or “quite a lot” of confidence in Congress. Economic Problems o High unemployment, slow growth, and rising debt in many Western democracies erodes the effectiveness of democracy. o The International Labor Organization reports wavering belief that political policies in democratic states lead to a fairer and brighter future. o History shows that right-wing totalitarian movements generally draw popular support from middle-class folks seeking to preserve the status quo. o Often, the worse the economy, the more people describe themselves as “right-wing.” o Alternatively, left-wing totalitarianism often develops from working-class movements seeking to overthrow wealthy oppressors—think of the tension between the proletariat and bourgeois in Marxism. o Persistent unemployment, debt, and anxiety erode confidence that democracy works. What defines Democracy? o various definitions across the board

Political Risk  

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Political risk refers to the threat that decisions or events in a country will negatively affect the profitability and sustainability of an investment. Technically, political risk is the risk that political decisions, events, or conditions change a country’s business environment in ways that force investors to accept lower rates of return, cost them some or all of the value of their investment, or threaten the sustainability of their operation. Uncertainty fueled by o Arbitrary laws o fragile institutions o volatile societies

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Classifying Political Risk 

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The primary types of political risk, from least to most disruptive, are o systemic o procedural o distributive o catastrophic.

Systemic o Systemic political risks, by influencing the macro business environment, affect the operation of all firms. Procedural o Procedural political risk institutes impediments that constrain the flexibility of local operations. o Micro risk, affects some businesses Distributive o Distributive political risks gradually eliminate the local property rights of foreign companies. o Creeping expropriation  whereby the gradual reduction of the MNE’s local property rights (via legislation, regulation, and taxation) captures a bigger share of its profits. Catastrophic o Catastrophic political risk devastates the business environment for all companies.

The Legal Environment  

The legal system specifies the rules that regulate behavior, the processes that enforce laws, and the procedures that resolve grievances. Legal systems differ across countries due to variations in tradition, precedent, usage, custom, or religious precepts.

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Modern legal systems evidence three components: o 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 o Criminal Law  safeguards society by specifying what conduct is criminal, and prescribing punishment to those who breach those standards o 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 o Common law  relies on tradition, judge-made precedent, and usage.  Common law is developed by judges through the decisions of courts.  The doctrine of stare decisis is a distinguishing feature—it obliges judges to respect the precedent established by prior court rulings  Common law has Anglo-American legacies  prevails in, among others, Australia, Canada, England, Hong Kong, India, New Zealand, and the United States. o Civil law  Civil law is based on strict application of statutory laws.  A civil law system relies on the systematic codification of accessible, detailed laws.  In contrast to stare decisis, judicial officers in a civil law system are not bound by precedent.  Civil law is the most widespread type of legal system in the world  we find it in approximately 150 countries, including France, Germany, Japan, and Mexico. o Theocratic law  Theocratic law is based on the inspirations and instructions of religious teachings.  A theocratic law system relies on religious doctrine, precepts, and beliefs.  Ultimate legal authority is vested in religious leaders, who regulate business transactions and social relations based on their interpretation of a sacred text.  No separation of church and state  The most prevalent theocratic system, Muslim or Islamic law, Shari’a, is based on the Qur’an (Koran), the Sunnah (decisions and sayings of the Prophet Muhammad), the writings of Islamic scholars, and the consensus of legal communities in Muslim countries.  Muslim law prevails in the Middle East and northern Africa. However, modernists (e.g., Turkey, Indonesia), traditionalists (e.g., Kuwait,

Malaysia), and fundamentalists (e.g., Iran, Saudi Arabia) advocate different interpretations of Shari’a. o

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Customary law  Customary law is based on norms of behavior that gain legitimacy through ongoing practice.  A customary law system reflects the wisdom of daily experience or, more formally, enduring spiritual legacies and time-honored philosophical outlooks.  It anchors legal systems in many indigenous communities, defining the rights and responsibilities of members.  Legitimacy follows not from the stamp of a powerful person or institution, but from individuals recognizing the benefits of complying with community standards.  prevails in many developing countries, particularly in Africa.  nations operate under a wholly customary legal system. Rather, this type often plays a role in countries that have a mixed legal system. Mixed  A mixed legal system results when a nation uses two or more of the preceding types.  Most are in Africa and Asia  The Philippines, South Africa, and Guyana, for instance, follow a blend of civil and common law.  Nigeria, Malaysia, and Kenya mix common, theocratic, and customary law.  Bangladesh, Singapore, and Pakistan blend common and theocratic law.  Indonesia, Djibouti, and Oman, conversely, blend theocratic law with civil codes.

The Foundation of Legality 

The Basis of Rule o Rule of man vs. rule of law o Rule of man  The rule of man holds that ultimate authority resides in a person whose word and whim, no matter how unfair or unjust, is law.  In whatever form and with whatever title, the rule of man defines a legal system in which the sovereign leader’s actions are not restricted by a constitution, regulated by criminal codes, or open to opposition.  Constitutional issues are discretionary, criminal law is arbitrary, and opportunism taints commercial and civil matters.  Hence, the rule of man is an instrumental device of authoritarianism. o Rule of law  The rule of law holds that no one, whether a public official or private citizen, is above the law.  “all men are created equal” ideology  Blind justice in America

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The rule of law holds that governmental authority is legitimately exercised in accordance with written, publicly disclosed laws.  Laws are clear, publicized, and protective of fundamental rights; they are developed, administered, and enforced transparently; all citizens have access to a competent, independent, and ethical judiciary; and all officials are accountable to the law of the land.  Democracy, fortified by the rule of law, works precisely because it has the legal tools to constrain state power in safeguarding lives, liberty, and property. Mapping the Basis of Law o Originating in the Magna Carta of 1215, the concept of the rule of law anchored the legal evolution of many developed economies, most notably Great Britain, the United States, France, and Germany. o The rule of man anchors the legal systems of many of today’s emerging countries.  In countries where the rule of man is the basis of law, acceptable marketplace behavior is unpredictable.  Managers stay alert to trumped-up charges, solicitation of bribes, and favoritism of local rivals. o Rule of law prevails in wealthier countries  United States, Canada, Japan, New Zealand, Australia, and most of Europe

Moving Towards the Rule of Law?   

History shows that as the developed, wealthier countries moved from agrarian to industrial economies, individuals called for laws to protect property rights. China’s economic performance tests the thesis that a positive relationship exists between the rule of law, economic growth, and prosperity. Some counter that the “West does not know best,” arguing that the efficiency and stability of a progressive, autocratic ruler are often more important than the liberty and freedom of a messy democracy.

Implications to Managers   

Uncertainty about the basis of law in a particular country complicates decision-making in the MNE. Operating in markets regulated by the rule of law sees consistent application of legitimate laws. Operating in markets regulated by the rule of man sees arbitrary, self-serving regulation.

Legal Issues Facing International Companies 

Operational Concerns o A fundamental thesis holds that productive business activity requires fair, just, and transparent rules that  set and sustain property rights  minimize the costs and complications of resolving disputes  specify rules that reduce the riskiness of business transactions  organize rules to protect contractual partners against abuse. o Operational concerns that managers face worldwide include

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 starting a business  entering and enforcing contracts  hiring and firing workers  closing a business. Getting Started  Starting a business involves activities such as registering its name, adopting the appropriate tax structure, obtaining licenses and permits, arranging credit, and securing insurance.  Some countries expedite this process, others complicate it.  The upshot: it takes about a day and a half to start a business in Canada but about two weeks in India. Making and Enforcing Contracts  The type of legal system in the country directly influences the standards of acceptable contracts.  The sanctity of a contract is vital to business transactions.  Countries using a common law system, for instance, encourage precise, detailed contracts, whereas those with a civil law system sanction less exact agreements. Hiring and Firing  Singapore, New Zealand, and the United States have flexible labor-regulation statutes.  China provides the greatest flexibility in hiring, firing, and setting employment conditions (work hours, mini- mum wages, and benefits).  In contrast, Angola, Belarus, and Paraguay strictly regulate how companies terminate employees as well as require generous severance payments.  India’s Industrial Disputes Act, for example, requires any company employing 100 or more workers to obtain state permission before firing anyone, even if it has hit hard times. Getting Out or Going Under  Ireland, Japan, Canada, and Hong Kong, for instance, make shutting down fast (between four to eight months) and cheap (between 1 and 10 percent of the estate).  India’s lack of a comprehensive bankruptcy code complicates dealing with creditors, officials, and courts, which in turn discourages bankruptcy.  Consequently, only 4 of every 10,000 firms go bankrupt in India, compared with 350 per 10,000 firms in the United States.  142 Bankruptcy in Indonesia, Vietnam, and Ecuador is slow (between five to eight years) and expensive (between 10 and 30 percent of the estate).  Several countries, including Burundi, Cambodia, Guinea-Bissau, and Dominica, stipulate no standards to govern dissolution.

Strategic Concerns 

Strategic concerns that managers face worldwide include o product origin and local content o marketplace behavior

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o legal jurisdiction o product safety and liability o intellectual property protection. Product Legislation o National laws affect the flow of products across borde...