Chapter 6
The Political and
Legal
Environment
Learning Objectives:
• The Political-Legal Environment: Meaning
• Legal Issues in International Business
• The Legal Systems
• Political Systems
• National Economic Ideologies
• Political Risk
• Antitrust Regulations
• Piracy and Counterfeiting
Understanding Vietnamese Business Culture
Hanoi, Vietnam – Forming
international business alliances is
often lucrative but can be difficult.
An understanding of the culture
with which you hope to do
business is essential in reaching an
agreement. Conducting business
in Vietnam requires a solid
understanding of Vietnamese
business culture. Many potential
business deals have been ruined
when international business
people inadvertently disobeyed https://www.veem.com/library/how-to-do-business-in-
vietnam/
Understanding Vietnamese Business Culture
the norms of Vietnamese corporate culture. A single
gesture that is considered offensive can spell the end of a
transaction.
The introduction to potential Vietnamese business
partners is crucial. Business cards are an important part of
any business transaction. It is important to give and receive
a business card with both hands. Shaking hands upon
meeting and saying goodbye is expected. A handshake must
use both hands, and it is important to bow your head
slightly when shaking as a sign of respect. Once successful
introduction has been made, business talks are given the
green light, but they are far from easy and success is never
guaranteed.
Understanding Vietnamese Business Culture
Setting up shop in Vietnam always involve
working with the government officials. Some business
are frustrated by the slow procedure of gaining
necessary permits from the government to operate a
foreign business. It is important to stay in continual,
direct contact with the officials responsible for
approving business. Individual connections are not so
important in Vietnam as in other Asian nations, as
most decisions are made by a committee.
Business negotiations can be confusing, as the
Vietnamese attempt to avoid unpleasantness in
confrontation.
Understanding Vietnamese Business Culture
Significant misunderstanding can arise if you do
not continually check any commitments that are made.
Navigating a new culture can take a lot of work and
good diplomatic skills, but developing solid business
relationships in the global economy can be a great tool
in promoting cross – cultural understanding.
As you read this chapter, consider how
companies adapt to different cultures when conducting
business with global partners.
The Political – Legal Environment:
Meaning
- It encompasses factors and
trends related to governmental
activities, specific laws and
regulations that affect the
operation of the global firms.
- It is closely tied to the social and
economic environments.
Legal Systems
A country’s legal system is its set of laws and
regulations, including processes by which its law are
enacted and enforced in ways its courts hold parties
accountable for their actions.
Many cultural factors – including ideas on social
mobility, religion and individualism – influence a
nation’s legal system. Likewise, many laws and
regulations are enacted to safeguard cultural values
and beliefs.
Legal systems are frequently influenced by
political moods and upsurges of nationalism- the
devotion of people to their nation’s interest and
advancement
Legal Systems
• Civil law systems have their origin in the Roman legal tradition. Civil
systems vary widely, both in procedure and substantive law, so
conducting research on a particular nation's civil law system should
include looking at that nation's specific system of law, but they do
have some trademark characteristics. Nations with civil law systems
have comprehensive, frequently updated legal codes. Most
importantly, case law is a secondary source in these jurisdictions.
France and Germany are two examples of countries with a civil law
system.
• Common law systems, while they often have statutes, rely more on
precedent, judicial decisions that have already been made. Common
law systems are adversarial, rather than investigatory, with the judge
moderating between two opposing parties. The legal system in the
United States is a common law system (with the exception of
Louisiana, which has a mix of civil and common law).
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Legal Systems
• Customary law systems are based on patterns of behavior (or
customs) that have come to be accepted as legal requirements or
rules of conduct within a particular country. The laws of customary
legal systems are usually unwritten and are often dispensed by
elders, passed down through generations. As such, customary law
research depends greatly on the use of secondary sources.
Oftentimes, customary law practices can be found in mixed legal
system jurisdictions, where they've combined with civil or common
law.
• Religious legal systems are systems where the law emanates from
texts or traditions within a given religious tradition. Many Islamic
nations have legal systems based in whole or in part on the Quran.
• Mixed legal systems refer to legal systems where two or more of
the above legal systems work together.
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Common Law
The practice of common law originated in
eleventh-century England and was adopted in that
nation’s territories worldwide. The U.S. legal system,
therefore, is based largely on the common law
tradition (although it integrates some aspects of civil
law). A common law legal system reflects three
elements:
Tradition. A country’s legal history
Precedent. Past cases that have come before the
courts
Usage. How laws are applied in specific situations.
Common Law
Under common law, the justice system decides
cases by interpreting the law on the basis of
tradition, precedent, and usage. Yet each law may be
interpreted somewhat differently in each case to
which it is applied.
In return, each new interpretation sets a
precedent that may be followed in later cases. As
new precedents arise, laws are altered to clarify
vague wording or to accommodate situations not
previously considered.
Common Law
Business contracts tend to be lengthy in
common-law nations (especially the United States)
because they must consider many possible
contingencies and many possible interpretations of the
law in the case of dispute. Companies devote
considerable time to devising clear contracts and
spend large sum of money on legal advise.
On the positive side, common-law systems are
flexible. Instead of applying uniformity to all situations,
laws take into account particular situations and
circumstances. The common-law tradition prevails in
Australia, Britain, Canada, Ireland, New Zealand, the
United States, and some nations in Asia and Africa.
Civil Law
The origins of the civil law tradition can be
traced to Rome in the fifth century B.C. It is the
world’s oldest ad most common legal tradition.
A civil law is based on a detailed set of written
rules and statutes that constitute a legal code. Civil
law can be less adversarial that common law because
there tends to be less need to interpret what a
particular law states.
Because all laws are codified and concise,
parties to contracts tend to be more concerned only
with the explicit wording of the code.
Civil Law
All obligations, responsibilities, and privileges
follow directly from the relevant code,
Less time and money are typically spent
therefore, on legal matters.
But civil law systems can ignore unique
circumstances for particular cases. Civil law is
practiced in Cuba, Puerto Rico, Quebec, all of Central
and South America, most of Western Europe, and
many nations in Asia and Africa.
Theocratic Law
A legal tradition based on religious teachings is
called Theocratic Law. Three prominent theocratic
legal systems are Islamic, Hindu, and Jewish law.
Hindu law was restricted by India’s 1950
constitution, in which the state appropriated most
legal functions, it does persists as a cultural and
spiritual force. Likewise, although Jewish law remains
a strong religious force, it has served few legal
functions since the eighteenth century, when most
Jewish communities lost their judicial autonomy.
Theocratic Law
Islamic law is the most widely practiced theocratic
legal system today. Islamic law was initially a code
governing moral and ethical behavior and was later
extended to commercial transactions. It restricts the
types of investments companies can make and sets
guidelines for business transactions.
According to Islamic law, for example, banks
cannot charge interest on loans or pay interest on
deposits. Instead, banks receive a portion of the profits
earned by investors who borrow funds and pay
depositors from these earnings. Likewise, because the
products of alcohol-and tobacco-related business violate
Islamic beliefs, firms abiding by Islamic law cannot invest
in such companies.
Standardization
Companies must adapt to dissimilar legal systems
because there is no clearly defined body of
international law that all nations accept. There is a
movement toward standardizing the interpretation
and application of laws in more that one country, but
this does not involve standardizing entire legal systems.
Enduring differences in legal systems, therefore, can
force companies to continue the costly practice of hiring
legal experts in each country where they operate.
Still, international treaties and agreements exist
in intellectual property rights, antitrust regulation,
taxation, contract arbitration, and general matter of
trade.
Standardization
International Organizations that promote
standardization include United Nations (UN), the
Organization for Economic Cooperation and
Development (OECD), and the International Institute
for the Unification of Private Law. The European
Union is standardizing parts of its member’s legal
systems to facilitate commerce in Western Europe.
Culture Matters: Playing by the Rules
Understanding legal systems in other countries begins
with an awareness of cultural differences. Here are
snapshots of several nation’s legal environments:
JAPAN. Japan’s harmony-based, consensus-driven
culture considers court battle a last resort. But with
growing patent disputes and a rise in cross-border
mergers, Japan is discovering the value of lawyers.
Japan has just 22,000 licensed attorneys compared
with more than 1 million in the United States. So
Japan is now minting thousands of new lawyers every
year. Japanese businesses now litigate disputes that
once might have been settled parties.
Culture Matters: Playing by the Rules
SAUDI ARABIA. Islam permeates every aspect of
Saudi Arabia and affects its laws, politics and
economics, and social development. Islamic law is
grounded in religious teachings in the Koran and
governs both criminal and civil cases. The Koran, in
fact, is considered to be Saudi Arabia’s constitution.
The king and the council of ministers exercise all
executive and legislative authority within the
framework of Islamic law.
CHINA. Factory workers in China must sometimes
endure military-style drills, verbal abuse, and
mockery.
Culture Matters: Playing by the Rules
But labor groups are winning higher wages, better
working conditions, and better housing from a flock
of lawyers and law students who hold free seminars
and argue labor cases in China’s courts. Inadequate
protection of worker’s rights is slowly giving to better
conditions for China’s 169 million factory workers.
Political Systems
A political system includes the structures,
processes, and activities by which a nation governs
itself. Japan’s political system, for instance, features
a Diet (Parliament) that chooses a prime minister
who will carry out the operations of government
with the help of Cabinet ministers.
The Diet consists of two houses of elected
representatives who enact the nation’s laws. These
laws affect the personal lives of people living in
and visiting Japan, as well as the activities of the
companies doing business there.
Politics and Culture
Politics and culture are closely related. A
country’s political system is rooted in the history
and culture of its people. Factors such as
population, age and race composition, and per
capita income influence a country’s political system.
Consider the case of Switzerland, where the
political system actively encourages all eligible
members of the society to vote. By means of public
referendums, Swiss citizens vote directly on many
national issues. The Swiss system works because
Switzerland consists of a relatively small population
living in a small geographic area.
Politics and Culture
Contrast this practice with that of most
other democracies, in which representatives of
people, not the people themselves, vote on
specific issues.
The Political Spectrum
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Political Ideologies
At one extreme lies to totalitarianism
The belief that every aspect of people’s lives
must be controlled for a nation’s political system
to effective.
Totalitarianism disregards individual liberties
and treats people as slaves of the political system.
The state reigns supreme over institutions
such as family, religion, business, and labor.
Totalitarian political systems include
authoritarianism regimes such as communism and
fascism.
Political Ideologies
At the other extreme lies anarchism
The belief that only individuals and private
groups should control a nation’s political
activities.
An anarchist views public government as
unnecessary and unwanted because it tramples
personal liberties.
Political Ideologies
Between totalitarianism and anarchism lies
pluralism
The belief that both private and public
groups play important roles in a nation’s activities.
Each group (consisting of people with
different ethnic, racial class, and lifestyle
backgrounds) serves to balance the power that
can be gained by other.
Pluralistic political systems include
democracies, constitutional monarchies and some
aristocracies.
Democracy
Democracy is a political system in which
government leaders are elected directly by wide
participation of the people or by their representatives.
There are two rather popular types of democracy:
• Direct Democracy: Many scholars point to Athens as
an example of direct democracy. Technically, every
citizen has an equal say in the workings of
government. (The qualifications for being considered
a citizen are completely different.) Citizens could show
up at a meeting, and then directly participate in the
governing process, and the process of making laws.
Democracy
Representative Democracy
Representative Democracy – a type of
democracy in which citizens elect individuals from
groups to represent their political views. In a
representative democracy set-up, citizens elect
representatives who actually make the law. The
United States operates similarly to this principle.
Citizens elect legislators who, in turn, make laws. In
the U.S., even the president isn’t elected directly;
representatives called electors make the decision
(although designated electors usually vote according
to the wishes of the citizens in their states).
Republic
In theory, a republic is a political system in which the government
remains mostly subject to those governed. Some scholars define any
political system in which the citizens legitimize the government. As such,
some (including Montesquieu) consider the U.S. a republic. Indeed, there
are those that believe that any form of government that is not based on
heritage or authoritarian governance. In some cases, a representative
democracy (or any form of democracy) might be considered a republic.
Some of the types of republics that you might see include:
• Crowned (a constitutional monarchy might be considered a
crowned republic)
• Single Party
• Capitalist
• Federal (the United States is often referred to as a federal republic)
• Parliamentary
Monarchy
In a monarchy, a ruler is not usually chosen by the
voice of the people or their representatives. Often a
monarch is the head of state until he or she abdicates or
until death. In many cases a monarch is the final word in
government.
There may be functionaries to make decisions and
run the political system, but the monarch has discretion
with the laws, and how they are enforced. However, as
with other political systems, there are different types of
monarchies.
Monarchy
The type that many of us think of as common is
the absolute monarchy, in which the monarch truly has
the ultimate say in matters of government. However,
most monarchies in political systems today do not
follow this method. Many of them, especially in the
developed world, have limits.
Constitutional monarchies fall into this category
(and are sometimes considered republics as well). In
this type of monarchy, the ruler is the head of state, but
a constitution limits the power, and others make laws.
The U.K., Denmark, Kuwait, Spain, Sweden, Tuvalu, and
many more are examples of constitutional monarchies.
Communism
• In most cases, a communist state is based on the ideology
of communism as taught by Marx and/or Lenin. However,
some argue that these political systems are not true to the
ideals espoused by these revolutionary thinkers.
Communist states are often dominated by a single party, or
a group of people.
• A planned economy is often part of the governing class, and
in many cases resources are taken and then redistributed to
others, at the top of the system. Sometimes communists
call themselves “workers’ states” or “socialist,” but there
are very real differences in their operation.
Communism
• In a lot of cases, citizens are required to do certain
jobs, or have some of their life decisions — especially
concerning where they can live and what jobs they
can do. Communism is often considered an
authoritarian political system.
Dictatorship
Another authoritarian form of government is the dictatorship.
Normally, a dictator is the main individual ruling the country. While
there are lackeys and others who work for the dictator, he or she
makes most of the decisions, and usually has enforcers. In some
cases, the political system is run by a small group of people. Dictators
are not restricted by constitutions or parliaments. The governed are
usually not consented in any way. Elections held are usually affairs in
which the dictator is the only candidate.
One of the more common types of dictatorship is the
military dictatorship, in which a military organization governs,
running the political system. Sometimes, the military just exerts a
great deal of pressure on the government, running the country de
facto. In many cases, very few benefit from the decisions made in a
dictatorship.
Continuum of Economic Systems
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Economic Systems
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Capitalism
• Capitalism generally features the private ownership of the
means of production (capital) and a market economy for
coordination.
• Modern capitalism has favored free trade to take
advantages of increased efficiency due to national
comparative advantage and economies of scale in a larger,
more universal market. Some critics have applied the term
neo-colonialism to the power imbalance between multi-
national corporations operating in a free market vs.
seemingly impoverished people in developing countries.
Socialist economy
• Socialist economic systems (all of which feature
social ownership of the means of production) can be
subdivided by their coordinating mechanism (planning
and markets) into planned socialist and market socialist
systems.
• Communism is a hypothetical stage of socialist
development articulated by Karl Marx as "second stage
socialism" in Critique of the Gotha Program, whereby the
economic output is distributed based on need and not
simply on the basis of labor contribution.
Communism and Socialism
Communism
Belief that social and economic equality can be
obtained only by establishing an all-powerful
Communist Party by granting the government
ownership and control over all types of economic
activity.
Socialism
Belief that social and economic equality is
obtained through government ownership and
regulation of the means of production.
Mixed economy
• There is no precise definition of a "mixed economy".
Theoretically, it may refer to an economic system that
combines one of three characteristics: public and private
ownership of industry, market-based allocation with
economic planning, or free markets with state
interventionism.
• In practice, "mixed economy" generally refers to market
economies with substantial state interventionism and/or
sizable public sector alongside a dominant private sector.
Actually, mixed economies gravitate more heavily to one
end of the spectrum.
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Political Risk
All companies doing business domestically or
internationally confront political risk – the likelihood
that a society will undergo political changes that
negatively affect local business activity.
Political risk abroad affects different types of
companies in different ways. It can threaten the
market of an exporter, the production facilities of a
manufacturer, or the ability of a company to extract
profits from a country in which they were earned. A
solid grasp of local values, customs, and traditions
can help reduce a company’s exposure to political
risks.
Types of Political Risk
The broadest categories of political risk reflect
the range of companies affected. Macro risk
threatens the activities of all domestic and
international companies in every industry. Examples
include an ongoing threat of violence against
corporate assets in a nation and a rising level of
government corruption.
Micro risk threatens companies within a
particular industry (or more narrowly defined group).
For example, an international trade war in steel
affects operations of steel producers and companies
require steel as an input to their business activities.
Types of Political Risk
In addition to these two broad categories, we
classify political risk according to actions or events
that cause it to rise, including:
- conflict and violence
- terrorism and kidnapping
- property seizure
- policy changes
- local content requirements
Property Seizure: Confiscation
The forced transfer of assets from a company
to the government without compensation is called
confiscation. Usually the former owners have no legal
basis for requesting compensation or return of
assets. The 1996 Helms- Burton Law allows the U.S.
businesses to sue companies from other nations that
use their property that Cuba confiscated in its 1969
communist revolution.
The Cuban government faces nearly 6,000
company claims valued at $20 billion. But the U.S.
presidents repeatedly waive the law so as not to
harm its relations with other countries.
Property Seizure: Expropriation
The forced transfer of assets from a company
to the government with compensation is called
expropriation. The expropriating government
normally determines the amount of compensation.
There is no framework for legal appeal, and
compensation is typically far below market value.
Today, governments rarely resort to
confiscation or expropriation because these acts can
force companies to leave the nation and can
jeopardize future investment in the country.
Property Seizure: Nationalization
Whereas expropriation involves one or several
companies in an industry, nationalization means
government takeover of an entire industry.
Nationalization is more common than confiscation and
expropriation. Likely candidates for nationalization
includes industries that are important to a nation’s
security and those that generate large revenues.
In recent years, Venezuela’s President Hugo
Chavez nationalized that country’s telephone, electricity
and oil industries and threatened to nationalize more.
Business from other countries reacted to these moves
by not investing in Venezuela.
Intellectual Property
Property that results from people’s intellectual
talent is called intellectual property. It includes
graphic designs, novels, computer software,
machine-tool designs, and secret formulas, such as
that for making Coca-Cola. Technically, it results in
industrial property (in the form of patent or
trademark) or copyright and confers a limited
monopoly on its holder.
Most national legal systems protect property
rights- the legal rights to resources and any income
they generate. Similar to this types of property,
intellectual property can be traded, sold and licensed
Intellectual Property
in return for fees and/or royalty payments.
Intellectual property laws are designed to
compensate people whose property rights are
violated.
PATENT – property right granted to the inventor of a
product or processes that excludes others from
making, using or selling the invention.
TRADEMARK – property right in the form of words or
symbols that distinguish a product and its
manufacturer.
Intellectual Property
COPYRIGHT – property right giving creators of
original works the freedom to publish or dispose of
them as they choose.
Copyrights are protected under the Berne
Convention, which is an international copyright
treaty to which United States is a member, and the
1954 Universal Copyright Convention. More than 50
countries abide by one or both of these treaties.
Piracy and Counterfeiting
The term "counterfeit" describes fake
goods.
The term "piracy" describes the act of
reproducing movies, music, books or
other copyrighted works without
permission from the copyright owner.
stopfakes.gov/article?id=What-Is-the-Difference-Between-Piracy-and-Counterfeiting
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Antitrust Regulation
What Is Antitrust?
Antitrust laws are regulations
that monitor the distribution of
economic power in business, making
sure that healthy competition is
allowed to flourish and economies can
grow.
Antitrust laws apply to nearly all
industries and sectors, touching every
level of business, including
manufacturing, transportation,
https://www.investopedia.com/terms/a/antitr
ust.asp distribution, and marketing.
Antitrust Regulations
Laws designed to prevent companies from fixing
prices, sharing markets, and gaining unfair monopoly
advantages are called antitrust (antimonopoly) laws.
These laws try to provide consumers with a variety of
products at fair prices.
The United States and European Union are the
world’s strictest antitrust regulators. In Japan, the Fair
Trade Commission enforces antitrust laws but is often
ineffective because absolute proof of wrongdoing is
need to bring charges.
Companies based in strict antitrust companies
often argue that they are at a disadvantage against
competitors whose whom countries condone
Antitrust Regulations
market sharing, whereby competitors agree to serve
only designated segments in the market. That is why
firms in strict antitrust countries often lobby for
exemptions in certain international transactions. Small
businesses also argue that they could better compete
against large international companies if they could
join forces without fear of violating antitrust laws.
In the absence of global antitrust enforcement
agency, international companies must concern
themselves with the antitrust law of each nation
where they do business. In fact, a nation with (or
group of nations) can block merger or acquisition
Antitrust Regulations
between two nondomestic companies if those
companies do a good deal of business there.
This happened to the proposed $34 billion
merger between General Electric and Honeywell. GE
wanted to marry their manufacture of airplane
engines to Honeywell’s production of advance
electronics in the aviation industry. Although both
companies are based in the United States, together
they employed 100,000 Europeans. GE alone earned
$25 billion in Europe the year before the proposed
merger. The European Union blocked the merger
because it believed the result would be higher prices
for customers, particularly airlines.
Key Takeaways:
• Antitrust laws prohibit a number of business
practices that restrain trade.
Examples of illegal practices are price-fixing
conspiracies, corporate mergers that are likely to cut
back the competitive fervor of certain markets, and
predatory acts designed to gain or hold on to
monopoly power.
• Antitrust laws were designed to protect and promote
healthy competition within all sectors of the
economy.
Key Takeaways:
• The Sherman Act, the Federal Trade Commission Act
and the Clayton Act are the three pivotal laws in the
history of antitrust regulation.
• Today, the Federal Trade Commission, sometimes in
conjunction with the Department of Justice, is tasked
with enforcing federal antitrust laws.
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