CHAPTER 3:

GOVERNMENTAL AND
LEGAL SYSTEMS
Part II: National Environmental Difference
 LEARNING OBJECTIVES
• Discuss the philosophies and practices of the political environment
• Profile trends in contemporary political systems
• Describe current trends in political ideologies and their implications to MNE’s choices
• Explain political risk management
• Compare the relative benefits and drawbacks of proactive versus passive political risk
management
• Discuss the principles and practices of the legal environment
• Profile trends in contemporary legal systems
• Identify and describe key legal issues facing international companies
 INTRODUCTION
• Operating internationally exposes managers to diverse and conflicting pressures from wide-
ranging groups in different nations.
• Navigating among countries requires that MNEs study how political and legal circumstances
overlap and differ. Determining where, when, and how to adjust business practices without
undermining the basis for success is an enduring challenge.
• Managers study political and legal environments in order to adjust company activities to
local circumstances.
 THE POLITICAL ENVIRONMENT
• The goal of the political system is integrating the diverse elements of a society.
• Managers study Political System based on:
• Structural dimensions
• Power dynamics of the Govt.
• Specify institutions, organizations, and interest groups
• Norms and rules that govern political activities
 ANCHOR OF POLITICAL SYSTEM

Individualism Collectivism
Favors Favors
Democracy Totalitarianism

Advocates Advocates
Freedom of Individual Rights Right of Society over Individual

Supports Supports

Capitalism Controlled Economy

 THE POLITICAL SYSTEMS
Spectrum Analysis of Various Political System existing in the world
THE POLITICAL
SPECTRUM
• In practice, purely democratic and
totalitarian systems are exceptions. Looking
around the world, one sees many variations.
• For example, democratic systems range
from radical on one side (advocates of
extreme political reform) to reactionary
(advocates of a return to past conditions).
Likewise, totalitarian systems emphasize
different degrees of state control.
• Fascism aims to control people’s minds,
souls, and daily existence, whereas
authoritarianism confines itself to political
control of the state.
 TYPES OF DEMOCRACIES

Democratic
Govt.

Indirect Direct
Democracy Democracy

Presidential Parliamentary Multiparty Social

 TYPES OF TOTALITARIANISM

Totalitarianism

Secular Theocratic

Fascism Authoritarianism Socialism

 MANAGERIAL IMPLICATIONS

Democracy Totalitarianism
• MNEs invest and operate based on • Private enterprise, if permitted, supports
economic, not political, standards. state control of economic activities.
• The signalling devices of market activities, • The state favours local companies at the
not bureaucratic regulation, organize a expense of foreign competitors, providing
productive business environment. them with favourable financial assistance,
• Managers and Consumers are free to do as special tax programs, relaxed work
they see fit. regulations, and other benefits.
 STANDARD OF FREEDOM

Free Country Partly Free Not Free Country

• Open political competition Country • Almost no political
• Civil liberties • Limited political rights and civil liberties
• Independent media • Corruption • Rule of Man
• Examples include: United • Weak rule of law • Constraints on social
States, Brazil, U.K. • Unfair elections and religious freedom
• Examples: Saudi
• Censorship
Arabia, Iran, Russia
• Examples: Pakistan, etc.
India etc.
 Political risk refers to the threat that decisions or events in a country
will negatively affect the profitability and sustainability of an
investment.

Many fast-growing emerging

markets are rife with flashpoints.
POLITICAL RISK Arbitrary legal systems, fragile
institutions, volatile societies, and
corrupt regimes fan instability.
Trends that increase political risk
worldwide are:

The aftermath of the financial

crisis aggravates political risk in
both developed and developing
markets.
 CLASSIFICATION OF POLITICAL
RISKS
Micro
• Financial Anomalies: Regulatory policies that make it difficult for the company to get credit or arrange overseas loans.
• Competing Perspectives: The host government’s policies on, for instance, human rights labour conditions, or environmental sustainability, create public relation
Procedural problems for a foreign company at home.

• Unilateral Breach of Contract: The host government repudiates a contract negotiated with a foreign company or approves a local company doing the same.
• Tax Discrimination: A foreign company is saddled with a higher tax burden than a local competitor.
• Restrictions on Profit Repatriations: The host government arbitrarily limits the amount of profit that a foreign company can remit from its local operations to the
Distributive home office.

• Destructive Government Actions: Unilateral trade barriers, often via local-content requirements interfere with the distribution of products to local consumers.
• Harmful Action Against People: Local employees of a foreign company are threatened by kidnapping, extortion, or terrorist actions.
Systemic

• Expropriation/Nationalization: The host government or a political faction seizes a company’s local assets. Compensation, if any, is usually trivial.
Resurgent totalitarianism and resource nationalism increase this risk.
• Civil Strife, Insurrection, War: Military action damages or destroys a company’s local operations.
Catastrophic

Macro
 MANAGING POLITICAL RISK

Pro-active approach Passive Risk management

• Predicting political events and changes • Political environment is full of chaos and
through: predicting it is both costly and futile
• Rigorous Statistical analysis • It is easier to hedge your political risk by
• Sentiment Analysis; and outsourcing it to various insurance
• Subjective analysis by political experts companies or international financial
• Making policies and plans to counter any intermediaries like Asian Development
adverse predictions Bank and World Bank
THE LEGAL ENVIRONMENT
The Components and Classes
 The legal system is the mechanism for
conceiving, stipulating, interpreting, and
enforcing the law in a formal jurisdiction.
THE LEGAL
ENVIRONMEN
T Modern legal Constitutional Law
systems evidence Criminal Law
three components: Civil and Commercial Law
 TYPES OF LEGAL SYSTEMS
• Managers face five types of legal systems in the
world today:
• Common law
• Civil law
• Theocratic law
• Customary law
• Mixed
 COMMON LAW
• Common law is developed by judges through the decisions of courts.
• Judicial officials refer to statutory codes and legislation, but only after considering the rules
of the court, custom, judicial reasoning, prior court decisions, and principles of equity
• Examples includes Canada, the United States, India, Hong Kong, England
 CIVIL LAW
• 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 statues.
• Precisely stipulated statutory codes, however, constrain judges’ authority to interpret the law.
• Civil law is the most widespread type of legal system in the world.
• Examples includes Germany, France, Mexico, and Japan.
 THEOCRATIC LAW
• Theocratic law is based on the inspirations and instructions of religious teachings.
• Theocratic laws see no separation of church and state; government, law, and religion are one.
• The most prevalent Theocratic Law is Muslim Law or Islamic Law
• Examples includes Iran, Saudi Arabia, Kuwait etc.
 CUSTOMARY LAW
• Customary law is based on norms of behaviour that gain legitimacy through long-term
practice.
• Legitimacy follows not from the stamp of a powerful person or sanctification by an
institution, but from individuals recognizing the benefits of complying with community
standards.
• Examples includes Panchayat and Jirga system in Pakistan, Tribal laws of African Countries
etc.
 MIXED SYSTEM
• A mixed legal system emerges when a nation uses two or more of the preceding types.
• Legal pluralism results when two or more legal systems apply cumulatively or interactively.
• For Example:
• Nigeria, Malaysia, and Kenya mix common, theocratic, and customary law.
• Bangladesh, Singapore, and Pakistan blend common and theocratic law.
 Democracy

Rule of Law

Mixture

Legal System
Rule of Man

Totalitarianism
SYSTEMS
BASIS OF RULE IN LEGAL
 LEGAL ISSUES IN INTERNATIONAL
BUSINESS

Operational Issues Strategic Issues

• Starting a Business • Product Origin and local content
• Entering and Enforcing Contracts • Marketplace Behavior
• Hiring and firing workers • Legal Jurisdiction
• Closing a business • Intellectual Property
 Thanks

End of Chapter 3
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