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Chapter Three: Governmental and Legal System Dr. Hadeel Abdellatif Politics, Laws and Operating Internationally Politics and laws are always and everywhere dynamic. At different times, different parties champion different ideologies that endorse different political systems. Consequently, investing a...
Chapter Three: Governmental and Legal System Dr. Hadeel Abdellatif Politics, Laws and Operating Internationally Politics and laws are always and everywhere dynamic. At different times, different parties champion different ideologies that endorse different political systems. Consequently, investing and operating internationally exposes MNEs to risks that arise from change in a country’s political system. 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. Political Environment A political system is a 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. Individualism versus Collectivism It is useful to profile the similarities and differences among political systems according to the general orientation within a society about the primacy of the rights and role of the individual versus that of the larger community. Under an individualistic paradigm (e.g., the United States), political officials and agencies play a limited role in society. The relationship between government and business tends to be adversarial; government may intervene in the economy to deal with market defects, but generally it promotes marketplace competition. Under a collectivist paradigm, the government defines economic needs and priorities, and it partners with business in major ways. The government is highly connected to and interdependent with business; the relationship is cooperative. Political Ideology Applying the implications of individualism and collectivism to a political system brings us to the discussion of political ideology. A political ideology is the body of goals, theories, and aims that constitute a sociopolitical program. Pluralism indicates the coexistence of a variety of ideologies within a particular society. Although shared ideologies create bonds within and between countries, differing ideologies tend to split societies apart. The two extremes on the political spectrum are democracy and totalitarianism. Understanding the impact of political ideologies on business environments allows managers to adjust company practices and decision-making. Democracy A democracy represents a political system in which citizens participate in the decisionmaking and governance process, either directly or through elected representatives. Contemporary democracies share the following characteristics: freedom of opinion, expression, press, religion, association and access to information; freedom to organize; free elections; an independent and fair court system; a nonpolitical bureaucracy and defense infrastructure; and citizen access to the decision-making process. In decentralized democracies, e.g., Canada and the United States, companies may face different and sometimes even conflicting laws from one state or province to another. The defining characteristic of democracy is freedom. Measures of political rights and civil liberties have been developed to assess levels of freedom; a country may be rated as free, partly free, or not free. Totalitarianism Totalitarianism represents a political system in which citizens seldom, if ever, participate in the decision-making and governance process; power is monopolized by a single agent and opposition is neither recognized nor tolerated. Through the control of media, education, and police, the state suppresses dissent. In theocratic totalitarianism, religious leaders are also the political leaders. In secular totalitarianism, the government maintains power through the authority of the state. The Legal Environment A legal system is the means and methods a 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: 1. Constitutional law; 2. Criminal law; and 3. Civil and Commercial law. Types of Legal Systems Generally, legal systems fall into one of the following categories: Common law is based upon tradition, 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 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 is based upon religious precepts; ultimate legal authority is conferred upon religious leaders who govern society. The best example is Islamic law, or Sharīʿah, which is based on the Koran, the Sunnah, the writings of Islamic scholars, and the consensus of Muslim countries’ legal communities. 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. 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. Legal Issues Facing International Companies A. Operational Concerns 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. While there appears to be an inverse relationship between a country’s 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. Further, those 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. B. Strategic Concerns Many legal issues affect the process of value creation. The following legal contingencies often shape an international competitor’s strategic plans. 1. Product Regulation. Host governments set laws that regulate access based on the product’s country of origin—the country where it was grown, produced, or manufactured. Some countries apply this policy to product labels, under the title COOL (country-of-origin labeling), to inform consumers and support local producers. National security concerns also shape country-of-origin regulations. 2. 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. 3. Product Safety and Liability Regulation. Often products must be customized in order to comply with local standards, which may be higher than those found in a firm’s 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. 4. Legal Jurisdiction. Every country specifies which law should apply and where litigation should occur when agents are involved—whether they are legal residents of the same or different countries. 5. Intellectual Property Rights. Intellectual property rights consist of ownership rights to intangible assets, i.e., the right to control and derive the benefits from writing and other creative art forms (copyright), inventions (patents), and identifiers (trademarks). Problems arise because intellectual property, whether in the form of literature, music, design, software, scientific patents, or brand names, is difficult to create but easy to duplicate. Cross-national and cross-cultural legal differences complicate specifying, regulating, and enforcing intellectual property rights. The costs of piracy, whether in terms of lost sales and royalties or future creativity, are very high for registered owners. International Property Rights. constitute a legally enforceable but limited monopoly granted by a country to an innovator. Enforcement of IPRs is difficult due to the fact that there is no way to globally register a patent, trademark, or copyright. Discussion Discuss the economic difficulties faced when a country changes from a totalitarian to a democratic political system. Then have them compare the political transition of a large country (e.g., Russia) to the transition of a smaller country (e.g., Hungary). Ask whether political transition has been a smoother process in one of the two countries and examine the reasons for both the differences and the similarities in the two processes. Some people argue that the legal justification for ethical behavior is the only truly important justification. However, others argue that such a position is insufficient and note that everything that is unethical is not necessarily illegal. Discuss possible guidelines they might use when underdeveloped legal systems lack clear guidance with respect to business decisions. Identify companies, both domestic and foreign, that operate internationally. Explore the possible sources of political risk for each of those firms, given (i) the countries in which they have a presence and (ii) the basic nature of their products and operations.
