Module 3

Political and Legal Environment: Concept and

nature

of

political

and

legal

environment,

Governments intervention in business, Advantages

and disadvantages of intervention in Business
Introduction
For a multinational enterprise to succeed in countries
with different political and legal environments, its
management must carefully analyze the fit between
its corporate policies and the political and legal
conditions of each particular nation in which it
operates.
THE POLITICAL ENVIRONMENT
A

political

system

is

the

complete

set

of

institutions, political organizations, and interest

groups,

the

relationships

among

those

institutions, and the political norms and rules

that govern their activities. Thus, it integrates the
various parts of a society into a viable, functioning

entity.

It

also

influences

the

extent

to

which

government intervenes in business and the way in

which business is conducted both domestically and
internationally. The ultimate test of any political
system is its ability to hold a society together.
Inter-linkages occur in many ways, for example:

Political decisions inevitably affect the economic

environment.

Political decisions also influence the social and

cultural environment of a country.

Politicians can influence the pace at which new

technologies appear and are adopted.

The political environment is one of the less predictable

elements in an organisation's business environment.
The fact that democratic governments have to seek reelection every few years has contributed towards a
cyclical political environment.

The political environment in its widest sense includes

the effects of pressure groups who seek to change
government policies.

The

importance

of

monitoring

the

political

environment
It is important for organisations to monitor their
political

environment,

because

change

in

this

environment can impact on business strategy and

operations in a number of ways:

The stability of the political system affects the

attractiveness of a particular national market.

Governments

pass

legislation

that

directly

affects the relationship between the firm and its

customers, its suppliers and other firms.

Governments see business organisations as an

important vehicle for social reform.

The government is additionally responsible for

protecting the public interest at large.

The economic environment is influenced by the

actions of government.

Government is itself a major consumer of goods

and services.

Government policies can influence the dominant

social and cultural values of a country.

Organisations have to not only monitor the political

environment they also contribute to it.
Components of Political Environment
a)

Political Systems

There are different possible political systems. An open

system of government is democratically elected by the
population

of

country.

Totalitarian

systems

of

government occur where power derives from a select

group (e.g., communism) or based on the interests of
sectional groups (often military-based).
Features of Democratic Government
Free and fair elections, supported by media
freedom

 The

rule

judiciary

of

law,

(though

including
its

independent

robustness

varies

between states)
Civil

society

functioning

the

presence

voluntary

groups

of

freely-

(including

religious, political and labour) is a substantive

indicator of genuine pluralism.

Features of Authoritarian/autocratic government

Authoritarian government rests on rule by political
elite that has power for the time being. Such a
regime

usually

holds

on

to

the

suppressing dissent, often by force.

The idea that autocratic regimes

power

by

have

an

advantage in economic development was once

quite fashionable.
The plausibility of such a notion lies in the
advantages such regimes were said to have in
forcing through development in the long term.
An alternative view is that democracy is likely to
foster economic development.

Difference

Between

Democracy

Authoritarianism versus
Democracy
Power determines law; Constitutional framework;
equality before law
constitution
on paper
only
Rule
of law
Detention without
charge;
Right
to a fair trial; no
few rights for accused; detention
without charge;
Imprisonment for
Civil rights
torture
prohibited
political
Restrictions
ondissent
association,Right to vote and stand
expression and any activity
for office; freedom of
Political
contrary to the official line
association
and expression
Regular
elections;
one perrights
Elections with little or no
son/one vote; monitoring for
choice of the candidates
Elections
irregularities, intimidation
Courts are an administra- Independent judiciary;
Courttransparent process
tive arm of government
system
Press controlled by theEditorial and reporting indeFreedom
state; restricted reporting
pendent from government

of the press

b)

Constitution

Authoritarian

and

The Constitution of India was enacted, signed and

adopted

by

the

Constituent

Assembly

on

November 26, 1949.

On January 26, 1950, the Constitution of India came
into force on which date India also became a
Republic.
Indian constitution makes detailed provisions for the
following:
Citizenship, Fundamental Rights, Directive Principles
of State Policy, Structure of the Government,
Parliament and State Legislatures, Supreme Court
and High Courts, Relationship between the Union
and the States, Services, Official Language and
various other matters of basic importance.
Salient Features of Constitution
1. Longest written constitution in the world.
2. Consists of 22 Chapters, over 395 Articles and
12 Schedules.
3. It proclaims India
Democratic Republic.

to

be

Sovereign

4. Fundamental Rights are guaranteed to all

citizens of India.
5. Directive Principles

of

State

Policy

are

incorporated.
6. It establishes the parliamentary system of
government.
7. President of the Union is the constitutional
head; the Council of Ministers or the Union
Cabinet

is

the

real

executive

and

is

responsible to the Lok Sabha.

8. It is federal in form but unitary in spirit.
9. It is neither too rigid (as some provisions can
be amended by a simple majority) nor flexible
(as some provisions require special majority
for amendment).
10.
It declares India a secular state.
11.
It guarantees single citizenship to all
citizens.

It

introduces

adult

franchise, i.e., every adult above 18 years has

the right to vote and the system of joint
electorates.
12.
It establishes an independent judiciary;
the Supreme Court acts as a guardian of the
Constitution in place of the Privy Council.

c)Political Parties
The number of political parties also influences the
level of political stability. A one-party regime does not
exist outside the communist country. Most countries
have a number of large and small political parties
representing different views and value systems of
their population.
Single-Party-dominant country: government
policies tend to be stable and predictable over
time. A dominant party regime may maintain
policies such as high tariff and non-tariff barriers,
foreign direct investment restrictions, and foreign
exchange controls, which reduce the operational
flexibility of foreign companies.
Dual party system or two party system: is a
system

where

two major political

parties dominate politics within a government.

One of the two parties typically holds a majority in
the legislature and is usually referred to as
the majority party while the other is the minority
party. The term has different senses. In a dual-

party system, such as the United States and

Britain, the parties are usually not divided by
ideology but rather have different constituencies.
Multi party system: is a system in which
multiple political parties have the capacity to gain
control of government offices, separately or in
coalition.
d)
Political Ideologies
Ideology, one way to characterize the nature of
government is by its political ideology, ranging
from communism and socialism to capitalism.
Communism: the government owns and
manages all businesses and no private ownership
is allowed.
Capitalism: to an economic system in which free
enterprise is permitted and encouraged along
with private ownership. In a capitalistic society,
free-market

transactions

are

considered

to

produce the most efficient allocation of scarce

resources.
Socialism: generally is considered a political
system that falls in between pure communism
and pure capitalism. A socialistic government

advocates government ownership and control of

some industries considered critical to the welfare
of the nation.

THE LEGAL ENVIRONMENT

A legal system is the mechanism for creating,
interpreting, and enforcing the laws in a specified
jurisdiction. The three components of modern legal
systems are constitutional law, criminal law, civil and
commercial laws.
Legal Systems: A legal system is the means and
methods

country

uses

to

regulate

business

practices, define how companies conduct business

transactions, specify the rights and obligations of
those engaged in business transactions, and spell out
the methods of legal redress for those who believe
they have been wronged. Modern legal systems have
three components:
Constitutional law
Criminal law
Civil and Commercial law
Types of Legal Systems: Generally, legal systems
fall into one of the following categories:

 Common law: Common law is based upon

tradition, judge-made precedent, custom, and
usage; therefore, courts play an important role in
interpreting the law. Common-law nations include
Australia, Canada, New Zealand, and the United
States.
Civil law: Civil law is based upon a detailed set
of laws that comprise a code that includes rules
for conducting business; therefore, courts play an
important role in applying the law. Civil law
nations include France, Germany, and Japan.
Theocratic law: Theocratic law is based upon
religious precepts; ultimate legal authority is
conferred upon religious leaders who govern
society.
Customary law: Customary law anchors itself
in the wisdom of daily experience or great
spiritual or philosophical traditions. Customary

law may play a significant role in matters of

personal conduct in countries with mixed legal
systems.
Mixed System: A mixed legal system emerges
when two or more legal systems are used within a
single country. Although the majority of such
countries are found in Africa and Asia, the United
States legal system combines both common and
civil law.

Political and Legal environment comprises three vital

institutions: Legislature
Executive or government
Judiciary
Legislature
Legislature is most powerful legal institution
vested with such powers as policy making, lawmakings, budget approving, executive control and
acting as mirror of public opinion. The influence of

legislature on business is considerable. It decides

such vital aspects as the type of business
activities, the country should have, who should
own them, what should be their size of operation,
what should happen to their earnings and other
related factors.
Government as Executive
Also called the state the term government refers
to the centre of political authority having the
power to govern those it serves. For business
consideration,

we

should

know

governments

responsibilities

to

what

are

business.

Specifically, governments responsibilities towards

business are as follows:
o Establishment and enforcement of law
o Maintenance of order
o Money and credit
o Orderly growth
o Infrastructure
o Information
o Assistance to small industries
o Transfer of technology
o Tariffs and Quotas
Judiciary

The third political institution is judiciary. Judiciary

determines

the

manner

in

which

the

work

of

executives has been fulfilled. It settles the relationship

between private citizens, on one hand, and between
citizens and the government upon the other.
The powers of the judiciary are of dual type:
o The

authority

of

the

courts

to settle

legal

disputes.
o Judicial review - the authority of the courts to rule
on the constitutionality of legislation.
LEGAL ISSUES IN BUSINESS
Two major areas of concern to international business
concerning legal issues are operational concerns and
strategic matters.
Operational Concerns
o Efforts to start a business, to enter and enforce
contracts, to hire and fire employees, and to close
a business are all affected by national laws and
regulations.

o While there appears to be an inverse relationship

between a countrys per capita income and its
tendency to regulate business, the legal systems
of the more highly developed countries tend to
regulate

the

major

operational

features

of

business activity more consistently than do the

less developed nations.
o Countries that make it easy to start a business
also tend to impose fewer and simpler regulations
to

hire

and

fire

workers

and

impose

less

regulation in their courts and bankruptcy systems.

o A key change since the last World Bank study
shows Hong Kong, China surpassing the United
States in the ease of doing business ranking.

Strategic Concerns
Many legal issues affect the process of value creation.
The following legal contingencies often shape an
international competitors strategic plans.

o Country of Origin and Local Content: Local

content is important to all nations, and most
countries push foreign firms to add value locally.
In addition, product origin determines applicable
fees

and

restrictions

may
as

be
well.

subject
The

to

global

quantitative
credit

crisis

highlights this concern in the ongoing political

debate.
o Marketplace Behavior: National laws determine
permissible

practices

in

pricing,

distribution,

advertising, and the promotion of products, and

they vary widely from one country to another.
o Product Safety and Liability: Often products
must be customized in order to comply with local
standards, which may be higher than those found
in a firms home market. While product liability
laws are very stringent in markets such as the
United States, they are spotty, absent, and at
times even arbitrary in many less developed
countries.

o Legal

Jurisdiction:

Every

country

specifies

which law should apply and where litigation

should occur when agents are involvedwhether
they are legal residents of the same or different
countries.
Government intervention
Government intervention: Regulatory actions taken by
a government in order to affect or interfere
with decisions made by individuals, groups, or
organizations regarding social and economic matters.
Under government intervention, Government can:
Enact laws against production of certain
goods
Sale of certain goods
Consumption of certain goods
Prevent entry of private firms into certain
industries through its Industrial Policy
Limit the growth of private firms beyond a
certain limit ( MRTP Acts, Competition Acts
etc)

 Nationalize

certain

industries

whenever

necessary and desirable

Formulate and implement various kinds of
economic policies that include fiscal policy,
monetary or credit policy, industrial licensing
policy, commercial policy, exchange control
policy, etc.
Besides all these, the government at some
occasions becomes a competitor of private
firms in input markets. The public sector gets
preference
resources.
All these

in

the

allocation

measures

governments

amounts

adopted
to

of

scarce
by

the

GOVERNMENT

INTERVNTION.
Need for Government Intervention
Any economy (whether market, communist, or mixed)
should ensure that:
All those who are willing to work at prevailing
wage rate get employment
All those who are working get paid according
to their contribution to the total productivity.

 Factors of production are optimally allocated

between various industries
The entire population gets sufficient income
to cover at least basic requirements of food,
shelter and clothing.
The world has realized that the free market
system

has

failed

to

meet

the

above

expectations. The outcome of the failure of

the free system has resulted in the following
outcome:
Inequalities of Income and Wealth: The
market mechanism finds that Income and
wealth get concentrated in a few hands.
Those who possess productive resources and
mental abilities find it easy to access wealth.
Emergence of Monopolies: In a free
system, those firms who have exceptional
organizational abilities often take over the
inefficient

ones

thereby

giving

rise

to

monopolies.
Failure to provide full employment: The
market

economy

employment.

does

not

ensure

full

 Instability: Balance cannot be achieved with

millions of buyers and millions of sellers
taking their own independent decisions. This
imbalance gives rise to frictional disturbances
and cyclical booms and depressions.
Wastages of Market economy: Whenever
there is a depression in a market system, the
resources of production remain unutilized.
These productive resources can take care of
provide a living for the poor.
Indifference to and sacrifice of social
welfare: In a market since the sole aim is to
maximize profits, no one pays any heed to
social welfare.
Presence
of

externalities:

Diversion

between social & private costs and benefits

Poverty in the midst of plenty: In an
economy which is based on the principle of
private

profit

maximization,

tremendous

technological advancement has taken place.

This has resulted in tremendous rise in
production. But due to institution of private
property and the law of inheritance, the rich

become richer and poor masses continue to

be exploited.
Exploitation

of

backward

areas

and

world rivalry: By their MNCs and MNEs and

by selling arms and ammunition to poorer and
underdeveloped
countries

keep

countries,
on

the

developed

exploiting

backward

countries of African and Asia. These countries

also

put

restrictions

on

exports

from

developing countries and inversely try to

dump their products in developing countries.
This

hampers

the

rapid

economic

development of developing countries.

GOVERNMENT INTERVENTION IN INDIA

A wide range of measures are in place to
stabilize

economy

and

reduce

the

gap

between rich and poor. These measures are:

o Fiscal measures: To reduce the fiscal and
revenue deficit the government of India has a
strong control over its own expenditure. In

1984, the government announced a package

program to curtail public expenditure and to
postpone fresh recruitments to government
jobs. Post 1991 (after adoption of LPG), the
govt. has curbed the size of ministries to
control fiscal deficit (difference between govt.
expenditure & govt. revenue).
o Monetary measures: The monetary policy
of R.B.I., consists of extensive use of general
and selective control credit. The main thrust
has been to restrict the bank credit against
the

inflation

influence

the

of

sensitive
cost

and

goods

and

to

availability

of

commercial bank credit. The CRR was raised

from 6% to 15% to have control over liquidity
and expansion and contraction of credit.
o Supply Management: Supply Management
is related to the volume of supply and its
distribution system. The government has
focused its attention in having greater control
over the prices of wheat, rice, sugar, oils and

other commodities of mass consumption.

Some important measures are :
o Fixation of maximum prices:

For the

elimination of incentives for hoarding and

speculative

activity

of

food

grains

the

government fixes the maximum wholesale

and retail prices of food grains. It also fixes
minimum procurement price for major crops
to protect the interests of farmers.
o The system of dual prices: The items of
mass consumption are made available to the
people below poverty line at subsidized rates.
o Increase in the supplies of food grains:
The government takes care of additional
requirement of food grains through heavy
imports in situations of shortage.
o Adoption of Open General License (OGL)
import policy for importing sugar and pulses.
o Adjustments in trade and tariff policies in the
Central Government budgets to ensure that
domestic prices of Industrial products remain
competitive.

o Great reduction in excise duties on a number

of items is expected to accelerate the speed
of

industrial

revival

and

raise

industrial

growth.
o A number of acts of have been formulated to
protect the interest of Consumers. Stern
action is taken against those found guilty.
o A number of acts are also in place to take
care of protection of environment, ecology,
and water and air pollution. Due to the global
awareness

about

environment

protection,

various incentive schemes for eco friendly

products have been formulated.