CHAPTER-5 / Unit-II

Political & Legal Environment

Semester-I: Aug. Dec. 2023
Political Environment – Political Systems: Democracies, Theocracy, Socialism and
Communism; Political Risks and Methods to
Manage Political Risks (Chapter 3, Pg. 98 – 110)
Legal Systems (Chapter 3, Pg. 110 – 112)

from 7th Edition, Global Edition of John J.Wild and Kenneth L. Wild, International Business –
The Challenges of Globalization, Pearson

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 Explores the role of –
- Politics and Law in International Business

 To begin with –
▪ Different types of political systems
▪ How managers cope with political risk

 Then - we discuss –
▪ Several kinds of Legal systems
▪ Ethics
▪ Social responsibility and how International relations affect business

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 China is world’s second largest internet market after the US

 Yahoo has 400 million users in 20 countries [communicates in 15

different languages]

 International companies should adapt their policies to suit local laws

[Ex: Yahoo Vs china]

 News corporation [Rupert Murdoch] “cut” BBC news from Asian

Broadcasts because it occasionally criticized china

“Understanding the nature of political laws in other countries

reduces the risk of conducting International business”.

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 Anarchism (pg.99) ………at one extreme
▪ Believes that only individuals and private groups should
control a nation’s political activities
▪ Views public Government as unnecessary and unwanted

 Totalitarianism (pg.99) ……..at the other extreme

▪ Believes that every aspect of people’s lives must be controlled for a
nation’s political system to be effective
▪ Has no concern for individual liberties
▪ People are considered as slaves of political system
▪ This includes authoritarian regimes like communism & fascism

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 Pluralism [lies within anarchism & totalitarianism] – pg.99
▪ Believes that both private and public groups play an
important role

▪ Try to ensure a balance between the groups [ethnic, racial,

class and lifestyle background]

▪ Includes democracies, monarchies and aristocracies

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 Political system (pg.98):
▪ includes the structures, processes and activities by which a nation
governs itself

 Ex: Japan
▪ Prime minister

▪ Japanese Diet (parliament) with Cabinet Ministers

▪ Diet consists of two houses that enact nation’s laws
[governing individuals and businesses]

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Types of political systems –
1. Democracy (pg.102)
2. Totalitarianism (pg.99)

DEMOCRACY: is a political system in which government leaders are

elected directly by the wide participation of the people or by their
representatives
Features of Democratic Political System (pg.102) :
[freedom of expression, periodic elections, full civil & property rights,
minority rights, non political bureaucracies]

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 Doing business in democracies (pg.103):
▪ Democracies maintain stable business environment primarily
through laws that protect individual property rights

▪ Commerce prospers when a balance exists among public and

private enterprises.

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2. Totalitarianism (pg.99) –
▪ Individuals govern without the support of the people, govt.
maintains control over many aspects of people’s lives and leaders
do not tolerate opposing view points.

▪ Ex: Then:
 Germany under Adolf Hitler, former soviet Union under Joseph Stalin

 Now: China, Myanmar, North Korea

[near total centralization of political power]

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 Features of Totalitarianism (pg.99-100):
▪ Imposed authority (leaders often acquire and retain power
through military force or fraudulent elections)

▪ Lack of constitutional guarantees (limit or reject freedom of

expression and civil rights & property rights)

▪ Restricted political participation (political representation is

limited to parties sympathetic to the government otherwise
banned)

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Types of totalitarian political system (pg.100):
▪ Theocratic totalitarianism – a political system under
the control of totalitarian religious leaders; who are also its
political leaders.
▪ Ex: Iran

▪ Secular totalitarianism - a political system in which

political leaders rely on military & bureaucratic power
Example: Communist: Ex – China & N.Korea; Tribal: Burundi &
Rwanda and Right Wing: Chile & Paraguay

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Doing business in totalitarian countries (pg.101):
▪ +ves –
 No opposition by non govt. organizations or private parties

▪ - ves –
 Have to bribe the government/refusal may result in loss of market access
 Law is vague or non existent (in China – its how individual bureaucrat
interprets the law)
 Interpretation of law can be different every time, say - resolution of
contractual disputes
 Bear the brunt of politically damaging publicity for the company

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 -Is the likelihood that a government or society will undergo political
changes that negatively affect local business activity [may affect production
facilities, marketing of an exporter, threaten the ability to extract profits] – pg. 104

Causes of political risk:

▪ Corruption

▪ Changes in government

▪ Interference of religious & military leaders

▪ Unstable political system

▪ Conflict among races, religion, or ethnic groups

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1.Conflict and violence: (discourage investments, disturb manufacturing
& distribution or obtain materials and talented people) – pg. 104

2.Terrorism and kidnapping (through fear & destruction – World Trade Center
Attack on Sept.11, 2001, or making business executives as hostages for ransom) – pg.104

3.Property seizure (government sometimes seize the assets of companies

doing business within their borders through confiscation or expropriation) – pg.105

4.Policy changes (through cross-border investments like Taiwan against China and
limiting ownership of domestic companies like in India) – pg. 108

5.Local content requirements (laws stipulating that a specified amount of a

good or service by supplied by producers in the domestic market, thus supporting and
promoting local business activity) – pg. 108

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Arises from: Reduces ability to:
 People’s resentment  Obtain materials
toward government and equipment
 Territorial disputes  Manufacture and
between nations distribute products
 Ethnic, racial, or  Protect employees’ lives
religious disputes and firm’s assets

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 Terrorists activities by means of fear and destruction
– like attack on World Trade Orgn. In USA on 11th
Sept. 2001
 Kidnapping company executives as hostages for
ransom

Chapter
3 - 16
 1
Confiscation
Forced transfer of assets from a
company to the government
without compensation

2
Expropriation
Forced transfer of assets from a
company to the government
with compensation
3
Nationalization
Forced asset transfer to the
government of an entire
industry

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Policy changes restrict or limits
on:

▪ Foreign ownership

(Ex: PepsiCo’s was restricted to 49% ownership in India)

▪ Investment levels (like Taiwan against China)

▪ Business activities

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 Requirements forced by law –
▪ Using local raw materials
▪ Procure parts from local suppliers
▪ Employ minimum number of local workers
Disadvantages:
- non availability of trained workforce
- locally procured materials may be expensive or may be of poor
quality

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 Monitoring and attempting to predict political changes
from time to time

 When political risks extremely high – Avoid entering

the country

 When political risk levels are moderate and the market

is attractive – find ways to manage political risks

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1. Adaptation (pg.108)
2. Information gathering (pg.109)
3. Influencing local politics (pg.110)

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1.Adaptation Adaptation
Incorporate risk into strategies
business strategies

a.Local equity and debt (joint ventures and

strategic alliances) – BMW & Toyota in research and
Starbucks & Barnes & Noble – a coffee break with best-sel
b.Partnerships (sharing the risk by investing
through buying shares or cash loans)

c.Localization (modifying product to suit local

tastes & culture)
d.Development assistance to locals
(such as distribution and communication networks
like Shell & Royal Dutch oil companies working in Kenya)

e.Insurance (through project financing, say a power plant

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 Current employees with relevant
information
(contact with local politician or having
an experience of foreign assignments
for a longer time period)
2.Information Gathering
Gather data to better
predict and manage risk
Agencies specializing in political-risk
Services
(periodic reports generated by the banks,
political consultants, news publications
& risk-assessment services)

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 Lobbying
(Influencing local lawmakers
to enact favorable legislation
in the benefit of the company)
3.Influence local politics
Present firm’s views
on political matters Corruption
(Enactment of Foreign Corrupt Practices
Act in 1977 after a public disclosure of
the ‘bribe-giving’ incident by an
US company to a Japanese company
representative to obtain
large sales contracts)

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 A country’s legal system is - its set of laws and regulations, including the
processes by which its laws are enacted and the ways in which its courts hold
parties accountable for their actions

 A legal system is influenced by many cultural variables – social mobility-religion-

individualism

 Also influenced by the political system (totalitarianism or democracy) – both are

naturally interlocked

 International Companies can only operate within the boundaries set by a nation’s
political and legal frameworks; as it has to safeguard national interests and
sentiments.

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 Types of Legal Systems (pg.111-112)

There are three types of legal system around the world that international companies are facing the issues:

A. Common Law: Under Common Law the justice system decides cases by interpreting the law on the basis of:
1) Tradition: A country’s legal history
2) Precedent: Past cases that have come before the courts
3) Usage: How laws are applied in specific situation
Business contracts under common law tend to be lengthy and flexible covering various contingencies. The
common law tradition prevails in Australia, Canada, USA, Ireland, New Zealand, India and some parts of Africa.

B. Civil Law: A Civil Law is based on a detailed set of written rules and statutes that constitute a legal code. All
laws, responsibilities, privileges & obligations are directly followed from the relevant code. It is practiced in
Cuba, Puerto Rico, Quebec, all of Central and South America and most of the Western Europe.

C. Theocratic Law: A legal tradition based on religious teachings is called theocratic law. Islamic Law is most
widely practiced theocratic legal system today in most of the Gulf nations.

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