Chapter 6: Political & Legal

Environments

LO6.1. Identify and compare political and legal systems.

POLITICAL

Political system system of government in a nation.
Comprises of the relationships and institutions by which government
generate policies in response to the demands or support of the general
public.
Government form institutions and processes that are responsible for
making and enforcing the collective decisions for society.
Government may be considered the hardware of the political system,
whereas governance may be considered the software that determines
the quality of governing.
Competing interest groups may justify their policies and actions
according to a reasonably coherent and shared set of values or
ideology.
o Ideology is a set of values and beliefs that justifies certain
behaviours and guides economic and political actions.
In Western society, there have been 3 ideological traditions:
conservatism, liberalism & socialism
o Conservatism characterised by support for tradition, country,
authority, duty and hierarchy. Individuals seek security and
identity in a stable and orderly society.
o Liberalism characterised by belief in the importance of the
individual as opposed to any social group, in their rationality and
their freedom to make their own way in life. Focus on liberty.
o Socialism characterised by priorities of social equality,
common good above demands of the self-centred individual and
the dependence of the individual on the larger society. Key
elements include equality of outcomes, security, cooperation,
collectivism and social justice.
At a given point in time, political systems reflect a preference for a
particular mix of values drawn from 1+ of these ideological traditions.
Political systems can be assessed according to
o Degree to which they emphasise collectivism or individualism
o Degree to which theyre democratic or totalitarian
Systems that emphasise collectivism tend towards totalitarianism.
High value on individualism democratic. Grey area in between.

Collectivism
Stresses primacy of collective goals over individual
When collectivism is emphasized, needs of society are generally
viewed as more important than individual freedoms
In modern times, collectivist mantle has been picked up by socialists.

Socialism
Believes in state ownership of a countrys means of production,
distribution and exchange so everyone benefits.
In early 20
th
century, socialist ideology split into 2 groups
communists, and social democrats.
o Communists believed that socialism could be achieved only
through violent revolution and totalitarian dictatorship
Peaked in 1970s China, Cuba, Soviet Union, Eastern
Europe, SE Asia, Lao, Vietnam etc.
o Social democrats committed to achieving socialism by
democratic means no violent revolution or dictatorship.
Greates influence in Western nations AU, France,
Germany, Spain, Sweden etc. where social democratic
parties have held political power.
Brazil and India Marxist roots, social democratic
governments nationalised private companies state-
owned enterprises for public good.
But state-ownership of means of production can run counter to public
interest, performing poorly 1970s/80s privatisation.
o AU Hawke & Keating governments launched reforms e.g.
financial deregulation, floating exchange rates, tariff reduction.

Individualism
An individual should be free to determine his/her economic and political
pursuits.
Stresses tae interests of the individual over the state.
Individual economic and political freedoms are the ground rules on
which a society should be based.
Focuses on:
o Guaranteeing individual freedom and self-expression
o Letting people pursue their own self-interest in order to achieve
the best overall good for society.
Practically translates into advocacy for democratic political systems,
free market economies and level playing fields more favourable
environments for IB operation.
Since 1980s, waning of collectivism matched by ascendency of
individualism. Democratic ideals and free market economies swept
away socialism and communism in many states.

Democracy
A political system in which government is elected by the people,
exercised either directly or through elected representatives.
Most common form of democracy is representative democracy where
citizens periodically elect individuals to represent them in government
functions and make decisions on behalf of electorate.

Totalitarianism
A form of government in which one person or political party exercises
absolute control over all spheres of human life, and opposing political
parties are prohibited.
4 major forms of totalitarians
o Communist totalitarianism
o Theocratic totalitarianism
o Tribal totalitarianism
o Right-wing totalitarianism
Communist Totalitarianism
Advocates achieving socialism through totalitarian dictatorship.
Communism however is in decline worldwide, and most of the
Communist party dictatorships have collapsed since 1989.
In many respects, governments of China, Vietnam and Laos are
communist in name only, since those nations now adhere to market-
based economic reforms.
Theocratic Totalitarianism
Political power is monopolised by a party, group or individual that
governs according to religious principles.
Most common form is based on Islam e.g. in Saudi Arabia and Iran.
Limit political and religious freedom of expression, while laws of state
are based on their interpretation of Islamic principles.
Tribal Totalitarianism
Political party represents interests of a particular tribe and monopolises
power.
Has arisen periodically in African countries e.g. Zimbabwe, Tanzania,
Uganda, Kenya
Right-Wing Totalitarianism
Individual economic freedom allowed but individual political freedom
restricted in belief it could lead to communism.
Common feature of right-wing dictatorships is an overt hostility to
socialist or communist ideas.
Many of these governments backed by the military, and in some cases,
the government may be made up of military officers.
E.g. fascist regimes in Germany and Italian 1930s/1940s

LEGAL

Legal system system of rules and institutions that regulate behaviour
and the processes by which the laws of a country are enforced and
through which redress of grievance is obtained.
Importance of the legal system:
o A countrys laws regulate business practise, defining the manner
in which business transactions are to be executes
o It sets down the rights and obligations of those involved in
business transactions.
o Differences in the structure of law can impact on the
attractiveness of a country as an investment site and/or market.
Types of Legal Systems
Customary law system of law based on the shared rules and customs
of a community that have developed over a long period of time.
Important in indigenous and traditional communities.
o No country operates at a national level under customary law
system, but some countries combine customary law E.g. Nigeria
(common law, theocratic law Islamic, and customary law)
Common Law System based on tradition, precedent and custom, is
found in most of Great Britains former colonies. E.g. US, AU. Its
flexibly interpreted by judges as it applies to the unique circumstances
of each case.
Civil Law based on very detailed set of written laws and codes.
When law courts interpret it, they do so in regards to the codes. E.g.
Germany, France, Japan, Russia. Less flexible than common law
only apply law, not interpret.
Theocratic law system of law based on religious teachings. Islamic
law is most widely practised primarily moral rather than commercial
law, intended to govern all aspects of life. Koran as basis.
Realistically, many Muslim countries blend Islamic law and a common
or civil system (debate of application to modern world).

LO6.2. Outline current reforms to political systems.

Spread of Democracy
Notable development over past 15yrs is spread of democracy, and by
extension, decline of totalitarianism.
Freedom House classified
o 89 countries as free in 2005 (46% world population) and
o 58 countries as partly free (30% world population)
o 45 countries not free (24% world population)
Not all democracies are free, because some still restrict certain political
and civil liberties e.g. Russia.

Reasons for Spread of Democracy
Many totalitarian regimes failed to deliver economic progress to vast
majority of their populations.
New information and communication technologies have reduced the
states ability to control access to uncensored information.
o Authoritarian governments restricting access to Internet e.g.
Chinas firewalls
Economic advances of the past quarter century have led to the
emergence of increasingly prosperous middle and working classes who
have pushed for democratic reforms.

However, despite increased democracy in areas e.g. Middle East and North
Africa, majority arent democratic, and overall, democracy has decreased.
Civil liberties and political freedoms restricted by events e.g. Arab
Spring, War on Terrorism etc.
Rise of countries like China, Russia and Vietnam challenge assumption
that private capitalism rule of law and democracy economic growth
and go hand in hand.
However, questions re sustainability of Chinas/Russias growth under
authoritarian regimes. Argued theyll have to move to liberal
democracies.

New World Order and Global Terrorism
The end of the Cold War and the new world order that followed the
collapse of communism have given rise to intense speculation about
the future shape of global geopolitics.
The vision of a more harmonious world dominated by a universal
civilisation characterised by democratic regimes and free market
capitalism is questioned by some though.
The rise of Islamic fundamentalism is portrayed as a response to the
alienation produced by modernisation.
Huntington sees a world that is split into different civilisations, each of
which has its own value systems and ideology.
In addition to Western civilisation, Huntington predicts the emergence
of strong Islamic and Sinic (Chinese) civilisations, as well as
civilisations based on Japan, Africa, Latin America, Eastern Orthodox
Christianity (Russian) and Hinduism (Indian).
Huntington sees the civilisations as headed for conflict, particularly
along the fault lines that separate them, such as Bosnia (where
Muslims and Orthodox Christians have clashed), Kashmir (where
Muslims and Hindus clash) and the Sudan (where a bloody war
between Christians and Muslims has persisted for decades).
Huntington predicts conflict between the West and Islam and between
the West and China.
Global terrorism is a product of the tension between civilisation and the
class of value systems and ideologies. Others point to longstanding
conflicts.
Implications for IB many countries increasingly difficult to do business
in, because theyre wracked with violent conflict or theyre part of a
civilisation thats in conflict with an enterprises home country
civilisation.


LO6.3. Explain how political systems, governments and regulations
affect national economies and international business opportunities.

POLITICAL

Shifting Ideology and FDI
Retreat of collectivism good fro IB because pro-business and pro-free
trade values of individualism favourable environment for foreign
trade and investment.

The Radical View
An expression of Marxist socialism that opposes private ownership and
foreign investment, and advocated state ownership to prevent
exploitation by and dependency on foreign capital.
MNE is an instrument of imperialist domination
MNE is a tool for exploiting hose countries to the exclusive benefit of
their capitalist-imperialist home countries.
FDI by MNEs of advances capitalist nations keeps less developed
countries backward and dependent on advanced capitalist nations for
investment, jobs and technology
By end of 198-s, radical position was in retreat almost everywhere,
because:
o Collapse of Communism in Eastern Europe
o Generally abysmal economic performance in countries that
embraced the radical position.
o Growing belief by countries that FDI can be an important source
of technology and jobs and can stimulate economic growth.
o Strong economic performance of developing countries that
embraced capitalism instead.

Free Market View
Expression of liberalism that supports private ownership and individual
enterprise and advocates the free flow of foreign capital in order to
maximise national and global economic wellbeing.
FDI by MNEs increases overall efficiency of world economy
Free market views has been ascendant worldwide recently
No country has adopted free market view in pure form (same with
radical)
AU, GB, US most open to FDI, but political forces and the collective
interest may hold sway over private interests government restriction
on FDI.
o Governments concerned about allowing foreign control of
nations media telecommunications, defence, uranium mining
and transport
o Less about construction, tourism, retail, light manufacturing.

Pragmatic Nationalism
Most countries adopted this approach
Supports private enterprise and foreign investment when such
enterprise and investment are assessed by those in power to be in
their political interest and, according to them, national interest.
FDI has benefits and costs
FDI can benefit a host country by bringing capital, skills, technology
and jobs, but benefits come at a cost
FDI should be allowed as long as benefits outweigh costs.
E.g. Vietnam started to allow private ownership of industry and
gradually removed bans to FDI. FDI transformed it from agriculture-
based economy to industry and services based economy. Attractive
due to low labour costs, reliable power, transport and
telecommunications infrastructure, land availability, fiscal incentives
(tax relief and subsidies), expedited licensing processes etc.

Shifting Ideology
Recent years seen marked decline in number of countries that adhere
to radical ideology.
As a counterpoint, theres recent evidence of beginning of what may
become a shit to more hostile approaches to FDI.

LEGAL

Differences in Contract Law
Contract law is the body of law that governs contract enforcement.
Contract is a document that specifies the conditions under which an
exchange is to occur and details the rights and obligations of the
parties involved.
Common law is not as specific, therefore contracts drafted under
common law frameworks are very detailed. Not so in civil law systems,
as many issues already covered in civil code.
The UN Convention in Contracts for the International Sales of Goods
(CISG) establishes a uniform set of rules governing certain aspects of
the making and performance of everyday commercial contracts
between sellers and buyers who have their places of business in
different nations, irrespective of their legal traditions.
o To avoid question of what countrys laws to apply.
o By adopting the CISG, a nation signals to other nations that it
will treat the conventions rules as part of its law.
o Not all countries have ratified it e.g. China only elements, not
UK.

Property Rights and Corruption
Property rights
o Are legal rights over the use to which a resource is put and over
the use made of any income that may be derived from that
resource
o Almost all countries have laws that protect property rights,
however arent enforced y the authorities and rights are violated.
o Very important for the functioning of business, but can be
violated by either private action or public action.
Private action refers to theft, piracy, blackmail and the like by private
individuals or groups.
o Facilitated by weak legal system
o Inability of governments e.g. Somalia and Indonesia to patrol
their coastlines and enforce anti-piracy laws has increased the
reward-risk ratio for pirates.
o Cost to IB ransoms, damage, higher insurance premiums,
additional security, delivery delays, extra travel time.
Public action - when public officials extort income or resources from
property holders using various legal mechanisms including excessive
taxation requiring expensive licenses or permits from property holders,
or taking assets into state ownership without compensating owners.
Corruption use or abuse of an official position for private gain e.g.
demanding bribes form businesses in return for the rights to operate in
a country, industry or location.
o High corruption significantly reduces FDI, level of international
trade and economic growth rate.
o US Foreign Corrupt Practises Act makes it a violation of US law
to bribe a foreign government official to obtain or maintain
business over which the foreign official ahs authority, and
requires all publicly traded countries to keep detailed records so
its clear if a violation has occurred.

Intellectual Property
Intellectual property property thats the product of intellectual activity,
e.g. computer software, screenplay, chemical formula etc.
Patents documents giving the inventor of a new product or process
exclusive rights to the manufacture, use or sale of that invention for a
defined period.
Copyrights exclusive legal rights of authors, composers, playwrights,
artists and publishers to publish and dispose of their work as they see
fit.
Trademarks the designs and names, often officially registered, by
which merchants or manufacturers designate and differentiate their
products.
Protection of Intellectual Property Rights
o Differs between countries, but enforcement can be lax.
o World Intellectual Property Organization international
organization whose members sign treaties to agree to protect IP
o Paris Convention for the Protection of Industrial Property
oldest international treaty concerning protection of IP, signed by
174 nations.
o The Trade Related Aspects of Intellectual Property Rights
(TRIPS) required WTO members to grant and enforce patents
lasting at least 20 years and copyrights lasting 50 years.

Product Safety and Product Liability
Product safety laws are laws that set certain safety standards to which
a product must adhere.
Product liability involves holding form and its officers responsible when
a product causes injury, death or damage to its users.
AU Competition and Consumer Act 2010 (Cwlth) law regulating
business to promote competition and protect consumers in Australia.
European Community Product Liability Directive used as model for
other countries some uniformity in laws for companies looking at
cross-border legal risks.
Countries have different product safety and liability laws that may
require foreign companies to customise products to adhere to local
standards.
If product standards are lower in other countries, firms must decide
whether to produce products only of the highest standards or whether
they should produce products that respond to local differences, even if
that means that consumers may not be assured of the same levels of
safety in different countries.

Competition Law
Competition required within markets to encourage nations to undertake
political and economic reforms that move economies towards free
market systems.
Competition law is one means of promoting competition by preventing
businesses form obtaining or using market power for anti-competitive
practises.
Reducing barriers to international trade also promotes competition.
In AU, the Competition and Consumer Act 2010 (replaced Trade
Practises Act) impacts on many business practises
o Underpins consumer protection including public liability
o Instrument of competition policy and antitrust law.
o Global M&As common with globalization lowers competition
locally. CCA prohibits any acquisition of assets/shares if its
likely to lessen competition substantially.
o ACCC (Australian Competition & Consumer Commission)
enforces legislation.

LO6.4. Identify types and sources of political risk.
Political risk
The likelihood that political forces will provoke drastic changes in a
countrys business environment and adversely affect the goals of
business enterprises.
May originate in broader or macro-political environment, affecting all
business.
May be forces that affect a particular business or micro-section of
economy.

SOURCES OF POLITICAL RISK

Macro-political Risks
Likelihood that changes to the general societal environment will affect
the business context in a country
May arise form government actions e.g. mismanagement of economy;
or actions of non-government groups e.g. environmental groups.
DOMESTIC ENVIRONMETNAL FACTORS
o Stability of government party unity and popular support
o Socioeconomic conditions extent of unemployment & poverty
o Investment uncertainties related to property protection, contract
enforcement repatriation of profits
o Extend of internal conflict through terrorism and civil disorder
o Levels of corruption
o Ethnic tensions
o Role of military and religious groups in politics
o Quality of bureaucracy and governance
EXTERNAL FOREIGN ENVIORNMENAL FACTORS
o Regional instability
o Cross-border conflict
o Political and economic pressures form foreign groups and
institutions e.g. trade sanctions imposed by UN and loan
conditions from IMG.
Evident in countries experiencing social unrest and disorder. More
common in countries that:
o Contain more than 1 ethnic nationality
o With competing ideologies battling for political control
o Economic mismanagement high inflation, unemployment

Micro-Political Risk
Risk specific to particular firm or industry as a consequence of adverse
political action directed towards that firm or industry.
From government or non-government actions, domestic or foreign.
Arise because business may operate in politically sensitive industry
e.g. uranium mining, telecommunications etc.

Legal Risk
The likelihood that the legal system adversely affects the conduct of
business.
Risks arise when a countrys legal system doesnt provide adequate
safeguards for conduct of business e.g. enforce contracts or protect
property rights.
Likelihood a trading partner would break a contract or expropriate
property rights.
When legal risks are high, IB hesitates entering long-term contract or
JV with firm in that country.

TYPES OF POLITICAL RISK

Ownership-control risk risk that government actions will require a
counterproductive change to the preferred ownership or corporate
governance structure of the business. E.g. country nationalising or
transferring ownership of a firms assets.
Operational risk risk that government policies, regulations and
administrative procedures will directly constrain local business
operations. E.g. required to use local resources and products, price
controls, corruption. All increase cost of doing business.
Transfer risk arises form policies and actions that restrict the
movement of money, products, technology and personnel cross a
countrys international borders e.g. tariffs, non-tariff restrictions, limited
repatriation of profits and dividends.

LO6.5. Formulate strategies for managing a firms exposure to political
risk.
Political risk assessment attempt to quantify the degree of political
risk by identifying and rating political events that are likely to impact
business operations and decisions.
o Allows comparison across countries, flag unfavourable location
o EIU ratings assesses different risks, 10 dimensions.
o Public Risk Services produces International Country Risk Guide
22 variables in 3 categories political, financial, economic.
Choose appropriate entry mode exporting, licensing, JV with local
firm reduces risk exposure
Build political support at home and in host country e.g. lobby political
decision makers; gather intelligence of risk-generating events and
behaviour of key stakeholders; attain and maintain social legitimacy
Leverage international trade and investment agreements bilateral
trade and investment agreements to enhance firms bargaining power
with host government.
Share risk burden e.g. take out risk insurance and co-financing
ventures with multilateral agencies.
Establish low-tolerance policy towards corruption provide employ
training and reward ethical behaviour.
Increase bargaining power increased when a firm as something
unique and of high value to offer host government.