Political and Legal Context PDF

The Political and Legal Context Dr. Elaine Berkery This Photo by Unknown Author is licensed under CC BY-SA This Photo by Unknown Author is licensed under CC BY 1 The Political Environment • Politics effects business at all levels • Political constraints and political risk are part and parcel of...

The Political and Legal Context Dr. Elaine Berkery This Photo by Unknown Author is licensed under CC BY-SA This Photo by Unknown Author is licensed under CC BY 1 The Political Environment • Politics effects business at all levels • Political constraints and political risk are part and parcel of conducting business across national boundaries. • Facing multiple national constituencies its often difficult to meet the demands of all • What would need to know politically if we want to set up a facility in another country or simply enter their market? 2 The Political Environment: Key Players & Systems • Political environment identifies key players that the MNC has to deal with politically • Who is this likely to include?; • government, political parties, trade unions, interest groups and public opinion This Photo by Unknown Author is licensed under CC BY-NC 3 1 Political Systems • The structures & processes by which a state is governed • Two party system – two broadly based parties dominate, alternating between government and opposition, reflecting electoral fortunes • Authoritarianism – rule by individual(s) who claim absolute power to govern a state, with no substantive accountability to its citizens • Multi party system – many parties represent a wide spectrum of views, and where the government is likely to be a coalition of parties • Democracy – system which at a minimum is based on accountability to the voting public through regular, fair and free elections 4 Political Systems Authoritarianism Feature Democracy Power determines law Rule of Law Constitutional framework, equality Few rights Civil Rights Many; free speech, fair trial etc Restrictions Political Rights Right to vote, stand for office etc. Few candidates, little choice Elections Regular & free Administrative arm of government Courts Independent judiciary, transparent process Press controlled by state Freedom of Press Editorial & reporting independence from state 5 The Political Environment • Political processes can offer opportunities • Government incentives, preferential subsidies and other political acts alter the transaction costs for the MNC and influence strategic decision making • For e.g. high import tariffs may lead to MNC launching FDI • Being politically astute – having superior political intelligence & influence skills is a key skill for the MNC 6 2 The Political Environment • Historical landscape of political institutions and relations between countries is important • French colonies still import much from France • Air France – virtual monopoly on route This Photo by Unknown Author is licensed under CC BY 7 The Political Environment • Linguistic, cultural links, personal relationships may lead to vast knowledge of local market Spain & Latin USA banks This Photo by Unknown Author is licensed under CC BY-SA • Trade & investment dominance of Spain is result of political pressure in the form of economic aid packages with trade conditions This Photo by Unknown Author is licensed under CC BY-SA 8 The MNC – Government Relationship • Relationship with host & home government is most important political challenge • Governments affect eco-monetary & tax policies, price controls, intellectual property legislation & employment relations • Home continues to steer the MNC and shape operating environment. • MNCs lobby in support of their cause • Political leaders can intervene to influence decisions 9 3 MNC Political Objectives in Host Country 1. Establish favourable trade & investment climate 2. Remove limits on foreign ownership and to open access to markets 3. Remove obstacles to free trade and cumbersome regulations 4. Gain ‘legitimacy’ – acceptance as a local entity 10 The Legal Environment • Establishes ‘the rules of the game’ • Legal systems can be traced back centuries • Common law system – UK, USA. Independent judiciary relying on case precedents • Civil law – Europe – relies on legal code applied universally • Theocratic law – relies on religious code – Iran & Saudi Arabia • Dictates: Politics, Economy, Banking, Contracts, Marriage • Islamic law and Bank Interest 11 Legal Jurisdiction • Can be difficult to identify for the MNC • MNC is subject to laws of both home & host countries • Jurisdictional levels; international (International Court of Arbitration)- , regional (EU) , national This Photo by Unknown Author is licensed under CC BY-SA-NC 12 4 Some Legal Issues for MNCs • 1. Rule of Origin Laws; requirement of trade and important for determining duties. • EU – 60%, • USA- almost 100%, very Stringent globally This Photo by Unknown Author is licensed under CC BY-SA 13 Legal Issues for MNCs • 2. Competition; Anti Trust laws governing mergers, acquisitions, cartels – big variations globally • 3. Marketing & Distribution; • Tesco (UK) bought Levi jeans from wholesalers in the US, Canada and Mexico, countries where they are sold more cheaply. • The jeans were then sold in the UK at about half the price recommended by Levi Strauss. • The US-based manufacturer took legal action against Tesco, claiming that the price cuts and the fact that its clothes were sold in supermarkets affected its trade mark-protected brand. • The European Court accepted Levi’s argument. This Photo by Unknown Author is licensed under CC BY-SA-NC 14 Legal Issues for MNCs • 4. Product Liability Laws; Stringent in the US and EU but are lax or unenforceable in developing nations • 5. Patents; Nationality based – must file separately in each country. • First to file V first to invent • The first-to-file system is used in all countries,[including the United States, which switched to a first-inventor-tofile (FITF) system on March 16, 2013 after the enactment of the America Invents Act This Photo by Unknown Author is licensed under CC BY-SA 15 5 Political Risk Defined • Exposure to potential loss or adverse affects on company operations and profitability, caused by developments in a country’s political and /or legal system • Hence the two operate interdependently of each other. This Photo by Unknown Author is licensed under CC BY-SA 16 Political Risk • Political Risk is the probability of disruption to MNC operations from political forces and events • Concerns political stability, economic and regulatory climate and policy continuity • Managing political risk involves researching potential risks beforehand, taking steps to minimize risk and ensuring you have legal recourse. • Risk narrows the decision making span for MNC This Photo by Unknown Author is licensed under CC BY-SA 17 Examples of Political Risk • August 2018 Smurfit Kappa Group has confirmed that the government of Venezuela has taken temporary control of Smurfit Kappa Carton de Venezuela’s business in Venezuela for a period of 90 days. • In a statement, the paper and packaging company said the government of Venezuela has detained two of its employees and it is making all possible efforts to secure their release. This Photo by Unknown Author is licensed under CC BY-SA 18 6 Corruption Power centres Internal Political Risks Fragile coalition Fragmented Alliances Weak elements of society Internal Risks Social Unrest Alienated Groups Risk of terrorism 19 Military Invasion Insecure Borders International Risks Insecurity of resources Global Imbalances International Risks Disputes with Neighbours Trading Partner disputes Spill over of regional conflict Risk of terrorism 20 Types of Political Risk Ownership Risk - government could change governance structure or at extreme expropriation. Firms could be forced to reduce their stake by sharing ownership with local firm – India early 1970s/ AIG China Operational Risk – change to the rules of the game – new and arbitrary change to the tax system Transfer Risk – impediments to the transfer of factors of production such as capital 21 7 Managing Political Risk 1. Minimize outright investment – lease not buy 2. Sign treaties to protect mutual investment 3. Avoid high visibility acquisitions 4. Use host country finance 5. Source locally 6. Opt for strategic alliance with local partner 7. Speed up profit repatriation 8. Build political support 9. Monitor political and economic developments This Photo by Unknown Author is licensed under CC BY 22 Political – Legal Environment; Determinants of International Management • Many implications for the practice of international management • Political determines policies which affect business environment & investment context, thereby influencing MNC overall strategy for location and production. • Political behaviours within given regions emphasize what is generally accepted practice, for example lobbying & interest groups, corruption & bribery, extent of political interference. 23 Political – Legal Environment; Determinants of International Management • Legal – determines the legislative framework & institutional arrangements • Laws in relation to intellectual property, tax, equality and discrimination, minimum wage, employment laws & union recognition, safety standards, environmental protection, waste management all shape management practice within a given location 24 8 Political – Legal Environment; Determinants of International Management • National traditions for organizing work and familiarity with concepts such as teamwork, ESOPs • Union policies and attitudes on key aspects of the employment relationship • Education system and management development • Recruitment – legal regulations, pressure to recruit locals • Rewards & performance appraisal – national norms 25 9