International Business: The New Realities - Chapter 6 PDF

International Business: The New Realities Fifth Edition Chapter 6 Political and Legal Systems in National Environments...

International Business: The New Realities Fifth Edition Chapter 6 Political and Legal Systems in National Environments Slides in this presentation contains hyperlinks. JAWS users should be able to get the list of links by using INSERT+F7 Copyright © 2020 Pearson Education, Inc. All Rights Reserved Learning Objectives 6.1 Describe political and legal environments in international business. 6.2 Understand political systems. 6.3 Understand legal systems. 6.4 Describe the participants in political and legal systems. 6.5 Identify types of country risk produced by political systems. 6.6 Identify types of country risk produced by legal systems. 6.7 Know about managing country risk. Copyright © 2020 Pearson Education, Inc. All Rights Reserved What is Country Risk? Exposure to potential loss or adverse effects on company operations and profitability caused by developments in a country’s political and/or legal environments. Similar to “political risk,” but also can include economic challenges Each country has unique political and legal systems that often pose challenges for company performance. Example Coca-Cola’s business fell off in Germany when the government enacted a recycling plan. New laws required consumers to return non-reusable soft drink containers to stores for a refund of 0.25 euros. Rather than cope with the unwanted returns, big supermarket chains pulled Coke from their shelves. Copyright © 2020 Pearson Education, Inc. All Rights Reserved Dimensions of Country Risk Copyright © 2020 Pearson Education, Inc. All Rights Reserved Country Risk in Selected Countries Sources: https://www.allianz-trade.com/en_global/economic-research/country-reports.html Copyright © 2020 Pearson Education, Inc. All Rights Reserved Political and Legal Systems (1 of 2) Political system: A set of formal institutions that constitute a government. It includes legislative bodies, political parties, lobbying groups, and trade unions. The system also defines how these groups interact with each other. Three major types of political systems: – Authoritarianism – Socialism – Democracy These categories are not mutually exclusive Copyright © 2020 Pearson Education, Inc. All Rights Reserved Functions of Political Systems Provide protection from external threats. Ensure stability based on laws. Govern the allocation of valued resources among the members of a society. Define how society’s members interact with each other. Copyright © 2020 Pearson Education, Inc. All Rights Reserved Political and Legal Systems (2 of 2) Legal system: A system for interpreting and enforcing laws. The laws, regulations, and rules establish norms for conduct. It incorporates institutions and procedures for ensuring order and resolving disputes in commercial activities, as well as protecting intellectual property and taxing economic output. Four major types of legal systems: – Common Law – Civil Law – Religious Law – Mixed Systems Copyright © 2020 Pearson Education, Inc. All Rights Reserved Sources of Country Risk Political System Legal System government Laws, regulations, and political parties rules that aim to: legislative bodies ensure order in lobbying groups commercial activities trade unions resolve disputes other political institutions protect intellectual property tax economic output Copyright © 2020 Pearson Education, Inc. All Rights Reserved Political Systems: Authoritarianism (1 of 2) Government controls all economic and political matters. Either theocratic (religion-based) or secular A state party is led by a dictator. Membership is mandatory for those wanting to advance. Power is sustained via secret police, propaganda, regulation of free discussion and criticism. Today: Some countries in the Middle East and Africa; Cuba, North Korea. Ex-authoritarian states tend to have much government intervention and bureaucracy. Copyright © 2020 Pearson Education, Inc. All Rights Reserved Political Systems: Authoritarianism (2 of 2) China (1949-1980s) Germany (1933-1945) Soviet Union (1918-1991) Spain (1939-1965) Copyright © 2020 Pearson Education, Inc. All Rights Reserved Political Systems: Socialism Capital is vested in the state and used primarily as a means of production for use rather than for profit. Group welfare outweighs individual welfare. Government’s role is to control the basic means of production, distribution, and commercial activity. Socialism occurs in much of the world as social democracy (e.g., Western Europe, Brazil, India). Government intervention in the private sector. Corporate income tax rates are higher. Copyright © 2020 Pearson Education, Inc. All Rights Reserved Political Systems: Democracy Economic activity occurs freely, as per market forces. Limited government: The government performs only essential functions that serve all citizens, such as national defense, maintaining law & order, foreign relations, and providing basic infrastructure. Private property rights: The ability to own property and assets and to increase one’s asset base by accumulating private wealth. Property includes land, buildings, stocks, contracts, patents. Encourages initiative, ambition, innovation. Copyright © 2020 Pearson Education, Inc. All Rights Reserved Examples of Countries Under Various Political Systems Elements of Elements of Largely Democratic Authoritarianism Found in Socialism Found in Afghanistan Bolivia Australia Iran China Canada North Korea Egypt Japan Venezuela India New Zealand Several countries in Africa Romania United States (such as Eritrea, Sudan, Equatorial Guinea, Zimbabwe) Blank Russia Most European countries Blank Tanzania Most Latin American countries Copyright © 2020 Pearson Education, Inc. All Rights Reserved  Relationship Between Economic and Political Freedom Sources: International Monetary Fund, World Economic Outlook Databases, 2017, www.imf.org ; Daniel Kaufmann, Aart Kraay, and Massimo Mastruzzi, “The Worldwide Governance Indicators: A Summary of Methodology, Data and Analytical Issues,” World Bank Policy Research, Working Paper No. 5430, 2010, www.worldbank.org Note: On the horizontal access, a high score indicates better quality national governance Copyright © 2020 Pearson Education, Inc. All Rights Reserved Democracy and Openness (1 of 2) Democracy is associated with “openness”, the lack of regulation and barriers to the entry of firms in foreign markets. Openness is associated with: – Successful market entry. – Increased market demand. – Competition on quality, which improves overall product quality. – Increased competition, leading to efficiencies and lower prices- benefits to all constituents. Copyright © 2020 Pearson Education, Inc. All Rights Reserved Democracy and Openness (2 of 2) Example India has steadily lowered entry barriers to its car market. Foreign carmakers entered the market, greatly increasing the number of models for sale. Greater competition increased the quality of available cars, and car prices fell. Copyright © 2020 Pearson Education, Inc. All Rights Reserved Political and Economic Systems Authoritarianism is associated with command economies, wherein the state makes all decisions on what to produce, how much to produce, and what prices to charge. Democracy is associated with market economies and capitalism, in which decisions are largely left to market forces, that is, supply and demand. Socialism is associated with mixed economies, which have features of both market and command economies, combining state intervention and market mechanisms (e.g., Sweden, Singapore). Copyright © 2020 Pearson Education, Inc. All Rights Reserved National Governance National governance refers to the system of policies and processes by which nations are governed and the manner in which they develop laws and regulations, conduct public affairs, and manage public resources. National governance is related to political freedom and economic freedom. Political freedom is characterized by: – Free and fair elections – The right to form political parties – Fair electoral laws – Existence of a parliament or other legislative body – Freedom from domination by the military or other powers, or – Self-determination for cultural, ethnic, and religious groups Copyright © 2020 Pearson Education, Inc. All Rights Reserved The Rule of Law Existence of a legal system where rules are clear, publicly disclosed, fairly enforced, and widely respected by individuals, organizations, and the government. Common in the advanced economies. The legal system is: – Applied to all citizens equally. – Issued via recognized government authorities. – Enforced fairly and systematically by police forces and formally organized judicial bodies. Economic activity suffers and uncertainty increases when the rule of law is weak. Copyright © 2020 Pearson Education, Inc. All Rights Reserved Legal Systems: Common Law A legal system that originated in England and spread to Australia, Canada, USA, and other former members of the British Commonwealth (also known as case law). The basis of law is tradition, past practices, and legal precedents set by courts via interpretation of statutes, legislation, and past rulings. Judges have significant power to interpret laws based on the circumstances of individual cases. Thus, common law is relatively flexible. Copyright © 2020 Pearson Education, Inc. All Rights Reserved Legal Systems: Civil Law Found in France, Germany, Italy, Japan, Turkey, and much of Latin America. Based on an all-inclusive system of laws that have been “codified” - clearly written by legislative bodies. Laws are more “cast in stone” and not strongly subject to interpretation by courts. A key difference is that common law is mainly judicial in origin and based on court decisions, whereas civil law is mainly legislative and based on laws passed by national and state legislatures. Copyright © 2020 Pearson Education, Inc. All Rights Reserved Sampling of Differences between Common Law and Civil Law Legal Issues Civil Law Common Law Ownership of intellectual Determined by registration. Determined by prior use. property Enforcing agreements Commercial agreements Proof of agreement is sufficient become enforceable only if for enforcing contracts. properly notarized or registered. Specificity of contracts Contracts tend to be brief Contracts tend to be very because many potential detailed, with all possible problems are already covered in contingencies spelled out. the civil code. Usually more costly to draft a contract. Compliance with contracts Noncompliance is extended to Acts of God (floods, lightning, include unforeseeable human hurricanes, etc.) are the only acts such as labor strikes and justifiable excuses for riots. noncompliance with the provisions of contracts Copyright © 2020 Pearson Education, Inc. All Rights Reserved Legal Systems: Religious Law Strongly influenced by religious beliefs, ethical codes, and moral values, viewed as mandated by a supreme being. Most important religious legal systems are based on Hindu, Jewish, and Islamic law. Islamic law spells out norms of behavior regarding politics, economics, banking, contracts, marriage, and many other social and business issues. Copyright © 2020 Pearson Education, Inc. All Rights Reserved Legal Systems: Mixed Systems Two or more legal systems operating together. The contrast between civil and common law has become blurred as countries combine both systems. Authoritarianism is most associated with religious law and socialist law. Democracy is associated with common law, civil law, and mixed systems. Example Legal systems in Lebanon, Morocco, and Tunisia share elements of civil law and Islamic law. Copyright © 2020 Pearson Education, Inc. All Rights Reserved  Dominant Legal Systems in Selected Countries Primarily Primarily Primarily Mixed Systems Common Law Civil Law Religious Law Australia Much of western Much of the Bangladesh Canada Ireland Europe and Middle East and India Indonesia New Zealand Latin America North Africa Israel Kenya United Kingdom Japan Russia Afghanistan Malaysia United States South Korea Mauritania Philippines Pakistan Sudan Source: Based on World Legal Systems at www.juriglobe.ca Copyright © 2020 Pearson Education, Inc. All Rights Reserved Actors in Political and Legal Systems The government, or the “public sector”, operating at national and local levels. International organizations such as the World Bank, World Trade Organization, and the United Nations. Regional trade organizations, such as the European Union, and many others. Special interest groups such as labor unions and environmental advocates. Local competing firms, which oppose foreign firms. Copyright © 2020 Pearson Education, Inc. All Rights Reserved Special Interest Groups Typical Issues Group Typical Issue Example Labor unions Oppose imported U.S. united steelworkers union goods and global opposed imports of steel from sourcing China Competing Dislike competition Japanese rice producers businesses from foreign firms opposed imports of rice from the United States Customers May avoid foreign- Motorists in Australia accused B made products. Dislike P of unfair pricing of petroleum improper marketing products practices. Conservationists Fight against wildlife Environmentalists oppose loss and destruction of lumber imports from countries the natural environment with tropical rain forests Source: Based on World Legal Systems at www.juriglobe.ca Copyright © 2020 Pearson Education, Inc. All Rights Reserved Country Risk Produced by Political Systems: Government Takeover of Corporate Assets Confiscation: Seizure of corporate assets without compensation. Expropriation: Asset seizure with compensation. Nationalization: Takeover of an entire industry, with or without compensation. Examples In Venezuela, ExxonMobil and ConocoPhillips were forced to abandon multibillion-dollar investments in the local oil industry. Gradual yet persistent pressure from the Russian government led TNK-BP, a Russian subsidiary of British energy giant BP, to sell a major stake in its oil business to the national gas monopoly Gazprom. Copyright © 2020 Pearson Education, Inc. All Rights Reserved Country Risk Produced by Political Systems: Creeping Expropriation The most common expropriation today. The government gradually modifies regulations and laws after foreign MNEs have made big local investments in property and plants. Examples Abrupt termination of contracts. Creation of laws that favor local firms. The governments in Bolivia, Russia, and Venezuela have modified tax regimes to extract revenues from coal, oil, and gas companies. Copyright © 2020 Pearson Education, Inc. All Rights Reserved Country Risk Produced by Political Systems: Embargoes and Sanctions Governments may respond to offensive activities of foreign countries by imposing embargoes and sanctions. Sanctions are bans on international trade, usually undertaken by a country, or a group of countries, against another who is judged to have jeopardized peace and security. Embargoes are bans on exports or imports that forbid trade in specific goods with specific countries. Example: The U.S. has enforced embargoes against Cuba, Iran, and North Korea, labeled as state sponsors of terrorism. Copyright © 2020 Pearson Education, Inc. All Rights Reserved Country Risk Produced by Political Systems: Boycotts against Firms and Nations Voluntary refusal to engage in commercial dealings with a nation or a company. Examples from France Citizens boycotted Disneyland Paris, to express opposition to globalization and takeover of French farmland. French farmers boycotted McDonald’s and crashed a tractor into a shop to vent their anger with agricultural policies and globalization. Copyright © 2020 Pearson Education, Inc. All Rights Reserved Country Risk Produced by Political Systems: Wars, Insurrection, and Violence War and insurrection - Indirect effects can be disastrous for company activities. Terrorism: The threat or actual use of force or violence to attain a political goal through fear and intimidation. Some terrorism is sponsored by national governments. Terrorism particularly affects certain industries - tourism, hospitality, aviation, finance, retailing. Copyright © 2020 Pearson Education, Inc. All Rights Reserved Types of Country Risk Produced by Legal Systems Foreign investment laws Controls on operating forms and practices Marketing and distribution laws Laws regarding income repatriation Environmental laws Contract laws Internet and e-commerce regulations Inadequate or underdeveloped legal systems Copyright © 2020 Pearson Education, Inc. All Rights Reserved Country Risk Produced by Legal Systems Country risk: The Foreign Corrupt Practices Act (FCPA) Accounting and reporting laws Transparency in financial reporting Copyright © 2020 Pearson Education, Inc. All Rights Reserved Country Risk Arising From the Host Country (1 of 7) Foreign investment laws affect F D I-based entry. Examples: Japan - The “large-scale retail store law” restricted foreigners from opening warehouse-style stores like Toys”R”Us, in favor of smaller Japanese retailers. Mexico - Foreign oil companies cannot obtain 100% ownership of Mexican oil firms. United States - Restricts inward investments seen to affect national security. e.g., The U.S. Congress blocked Dubai Ports World, a Middle Eastern firm, which sought a deal to manage U.S. ports. Copyright © 2020 Pearson Education, Inc. All Rights Reserved Country Risk Arising From the Host Country (2 of 7) Controls on operating forms and practices are laws and regulations on how firms can conduct production, marketing, and distribution activities. Example In the telecommunications sector in China, the Chinese government requires foreign investors to seek joint ventures with local firms. This ensures local control of the telecom industry. Thus, China gains access to foreign capital and technology. Copyright © 2020 Pearson Education, Inc. All Rights Reserved Country Risk Arising From the Host Country (3 of 7) Marketing and distribution laws regulate practices in advertising, promotion, and distribution. Examples Finland, France, Norway, and New Zealand prohibit cigarette advertising on television. Canada and other countries cap prices in the pharmaceutical and other industries. Copyright © 2020 Pearson Education, Inc. All Rights Reserved Country Risk Arising From the Host Country (4 of 7) Laws on income repatriation limit the amount of net income or dividends that firms can bring back to the home country. Environmental laws aim to preserve natural resources, combat pollution, and ensure safety. Contract laws affect the sale of goods and services, intermediary agreements, licensing and franchising, foreign direct investment, and joint ventures. Internet and e-commerce regulations Example: In Germany, firms are responsible for recycling product packaging. Copyright © 2020 Pearson Education, Inc. All Rights Reserved Country Risk Arising From the Host Country (5 of 7) Inadequate or underdeveloped legal systems, or poor enforcement of existing laws. Laws may be weak regarding intellectual property, pollution, consumer protection, and other areas. While the problem is common in developing economies, it can occur in advanced economies too. Examples: In China and Russia, foreign firms sometimes abandon business ventures due to erratic legal environments. The recent global financial crisis was triggered partly by poor regulation in the United States and Europe. Copyright © 2020 Pearson Education, Inc. All Rights Reserved Country Risk Arising From the Host Country (6 of 7) Extraterritoriality: The application of home-country laws to other countries. For example, the European Union pursued Microsoft for monopolistic practices. The Foreign Corrupt Practices Act (1966; U.S.) made it illegal to offer bribes to foreign parties. The act may harm U.S. firms because foreign competitors are usually not so constrained. Copyright © 2020 Pearson Education, Inc. All Rights Reserved Country Risk Arising From the Host Country (7 of 7) Accounting and reporting laws differ widely around the world. Two examples: – Physical asset valuations: Canada and the U.S. use historical costs. Some Latin American countries use inflation-adjusted market value. – R&D costs: Expensed as incurred in most of the world; capitalized in South Korea and Spain. Some countries use both conventions. Transparency in financial reporting is the degree to which firms regularly reveal substantial financial and accounting information. This varies worldwide. Copyright © 2020 Pearson Education, Inc. All Rights Reserved Ethical Connections Many countries lack anti-bribery laws for international transactions. The Organization for Economic Cooperation and Development (OECD) recently called for a ban on “grease payments,” small-scale bribes intended to speed up telephone hookups, government paperwork, and other everyday matters in global commerce. A culture of grease payments and other corruption is corrosive, harming the rule of law and sustainable economic development. Copyright © 2020 Pearson Education, Inc. All Rights Reserved Managing Country Risk (1 of 3) Proactive environmental scanning: Management should develop a comprehensive understanding of the political and legal environment in target countries. Scanning - ongoing assessment of potential risks and threats to the firm, via intelligence sources such as: – Employees working in the host country. – Embassy and trade association officials. – Consulting firms, such as Business Entrepreneurial Risk Intelligence (BERI). Minimize exposure to country risks. Copyright © 2020 Pearson Education, Inc. All Rights Reserved Managing Country Risk (2 of 3) Strict adherence to ethical standards: Firms that engage in questionable practices or operate outside the law invite redress from the governments of the host countries where they do business. Alliances with qualified local partners: For example, firms often enter China and Russia by partnering with local firms who assist in navigating the complex legal and political landscape. Copyright © 2020 Pearson Education, Inc. All Rights Reserved Managing Country Risk (3 of 3) Protection through legal contracts: Contract law varies widely. The firm must follow the law in each country. Three approaches for resolving contract disputes: – Conciliation is a formal process of negotiation whose objective is to resolve differences in a friendly manner. It is the least adversarial method. Common in China. – In arbitration, a neutral third party hears both sides of a case and decides in favor of one party or the other, based on an objective assessment of the facts. – Litigation occurs when one party files a lawsuit against another. The most adversarial approach, it is common in the United States. Copyright © 2020 Pearson Education, Inc. All Rights Reserved You Can Do It: Christopher Johnson Christopher got his undergraduate degree from a state university a few years ago. Read his profile. Christopher’s major: Accounting After attending a study abroad program in Istanbul, Turkey, he gained a global business perspective and a passion to work in international finance. Jobs: Deloitte Tax LLP, Chicago; and Ayco (subsidiary of Goldman Sachs) “Understanding the role that international business plays across cultural variations will allow for a well- developed global commerce perspective. Such exposure will also assist with determining your specific career path of choice.” Copyright © 2020 Pearson Education, Inc. All Rights Reserved Copyright This work is protected by United States copyright laws and is provided solely for the use of instructors in teaching their courses and assessing student learning. Dissemination or sale of any part of this work (including on the World Wide Web) will destroy the integrity of the work and is not permitted. The work and materials from it should never be made available to students except by instructors using the accompanying text in their classes. All recipients of this work are expected to abide by these restrictions and to honor the intended pedagogical purposes and the needs of other instructors who rely on these materials. Copyright © 2020 Pearson Education, Inc. All Rights Reserved