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POLITICAL & LEGAL ENVIRONMENT

three
1. Understand how politics affects international trade and
foreign investment.
2. Distinguish between different types of political risk.
3. Discuss how Multinational Enterprises work with political
organizations and constituencies that affect their
operations and performance.
4. Identify the challenges of working in countries that have
differing political systems from home country.
5. Identify areas of jurisdiction with which Multinational
Enterprises should be concerned.
6. Identify some key international laws and issues that affect
Multinational Enterprises, like product liability, competition,
and intellectual property.
Political Environment:
Burger King Israel
• A Burger King franchisee opened a restaurant in Ma’aleh
Adumim, which is a suburb of Jerusalem under Israeli
control.
• Unfortunately, the restaurant was placed on the wrong
side of the 1967 border, so the Palestinian government
revoked the license of the restaurant to operate.
• Who had jurisdiction in this instance? Israel or the
Palestinian Authority?
• What types of political action will resolve this issue?
The Political Environment

• Politics plays an important role in international


business.
• Politics, and political behavior is defined as the
acquisition, development, securing, and use of
power in relation to other entities;
• where power is viewed as the capacity of social
actors to overcome the resistance of other social
actors.
The Institutional Context

• Organizations work closely with governments and


political actors in a pluralistic environment.

• Frequently, business objectives require the


cooperation of political authority and managers find
themselves working with government officials and
ministries to clear the way for operations.

• The ease of this work depends on the institutional


context they face in their negotiations.
The Institutional Context

• Managers sometimes work with governments that


are similar to their own. This makes the work
easier, due to affinity between the company and the
political actors, with common understanding of how
a system works.

• Sometimes, however, managers find themselves


working with governments that are very different.
This sometimes presents an animosity of systems
that make the work a great deal more frustrating
and difficult.
The MNE-Government Relationship
• Relationships between governments in the home
and host countries is an important issue facing
Multinational Enterprises.
• Governments affect the economic and legal
environment. They set monetary and tax policies,
price controls, and intellectual property regulations.
• They also influence labor relations, trade policies,
capital and exchange controls, and transfer pricing
policies. Government can be a regulator, a
legislator, a competitor, a customer, a distributor,
and a potential partner.
The MNE-Host Government Relationship

• Political power and size have a great deal to do with


how Multinational Enterprises deal with host
governments.
• Models like Sovereignty at Bay, Dependency, and
Neo-Mercantilism all assume a powerful MNE
interacting with a less powerful developing country.
• Some assume that the MNE doesn’t act in the
LDC’s best interest, and will pursue institutional
hegemony and control over that LDC.
The MNE-Host Government Relationship

• Perhaps the best way to describe the relationship


between MNE and host is one of Coopetition, which
is a simultaneous cooperation and competition in
the relationship between Multinational Enterprise
and Host.
• Multinational Enterprises compete with hosts in
establishing policy that is favorable.
• They cooperate with hosts in providing things
governments want: capital, employment, revenues,
and legitimacy.
The MNE-Host Objectives

• Favorable Trade And Investment Environment


• Nondiscrimination
• Access To Markets
• Few Regulatory Hurdles
• Legitimacy
The Host-MNE Objectives

• Protecting Vital Interests


• National Security
• Taxation
• Participation
• Protection Of Markets And Employment
• Legitimacy
The MNE-Host Bargaining Power

• Host bargaining power comes from creating an


attractive environment.
• Multinational Enterprise bargaining power comes
from proprietary technologies or products, capital,
potential tax revenue, big exports, employment,
complex management requirements, or
political/economic alliances.
Governments’ Investment Support

• Governments compete fiercely for investment. They


frequently provide incentives to companies seeking
to invest.
• These range from grants and investment
allowances, to subsidies, preferential tax treatment,
import duty exemptions, loans, loan guarantees,
and interest subsidies. These incentives can
exceed $100 Million to $ 1 Billion.
The MNE-Home Government Relationship

• The home government provides main operating


environment, helps negotiate its international affairs
and incentives, and even provides its own
incentives for foreign investment to targeted areas.

• The home government, in cases, can even close


the home environment to competition.
Home Government Tactics

• Political Pressure
• Commercial Pressure
• Financial Pressure
• Tied Aid
• Gifts, Favors
• Defense, Arms Sales
• Revocation Of Laws
• Visas
Political Risk

• Political risk is the probability of disruption of


operation from political forces or events and their
correlates.
• Risk comes from instability, whether that is political,
economic, regulatory, policy oriented, judicial, and
conflict oriented.
Lowest/Highest Political Risk

• United States • Iran


• United Kingdom • Iraq
• Netherlands • North Korea
• Norway • Cuba
• Sweden • Zimbabwe
• Australia • Afghanistan
• New Zealand • Libya
Types of Political Risk

• Ownership Risk, representing potential threats to


ownership from nationalization or seizure.

• Operational Risk, representing threats governments


impose for “changing the rules of the game.”

• Transfer Risk, represent impediments to the transfer


of production factors, products or capital.
Managing Political Risk: Strategies
• Minimize outright investment.
• Sign treaties that encourage and protect mutual
investment.
• Create settings where investment can be seized
when threatened.
• Avoid acquisition of national icon stature firms.
• Utilize host country financing.
• Accelerate profit repatriation.
• Create staggered technology transfer policies.
• Create local sourcing arrangements.
…/…
Managing Political Risk: Strategies

• Create alliances with powerful local partners.


• Utilize insurance agencies that specialize in political
risk.
• Build political support at home and in the host
through political action, lobbying, or other proactive
measure.
• Continuously monitor political and economic
development in order to prepare for changing political
risk.
• Remember that “business is international, but all
politics are local.” Try to manage political
relationships at the local levels.
The Legal Environment

• Common law
• Civil law
• Theocratic law
The Common Law System

• The Common Law System originated in the United


Kingdom, uses an independent judicial system that
relies legislative action, judicial interpretation
through case precedent, and application by users.

• The United Kingdom, United States, Australia, and


Canada are countries that utilize this system.
The Civil Law System

• The Civil Law system relies almost exclusively on a


legal code that is applied universally.

• Considered to be less flexible than a common law


system and requires frequent governmental
intervention.

• Most of Continental Europe and Latin America uses


the Civil Law System.
The Theocratic System

• The Theocratic System uses religious codes to


create a legal system.

• Islamic countries frequently use a theocratic system


called a “shariah”. While some countries exclusively
use Shariah systems, like Saudi Arabia and Iran,
others use a mixture of common, civil, and religious
law.

• Examples of these countries are Malaysia,


Singapore, and Indonesia.
Legal Jurisdiction and International Business

• Legal jurisdiction is the prevailing legal authority


under which a legal case can be judged.
• It is frequently very difficult to determine jurisdiction
in international business as MEs are subject to laws
in all countries they operate within.
• This is more difficult in globalization, since it is more
and more difficult to determine the true origins of
products. Firms often find they are subject to more
than one jurisdiction.
Legal Jurisdiction: Jurisdictional Levels
• International, where a firm is subject to international
law and an international regulatory system under
development.
• Regional-Global, where a firm is subject to laws and
regulations of regional entities and trade blocks.
• National, where firms are subject to laws of nations
within which they operate.
• Local, where firms are also subject to local laws and
ordinances.
Legal Issues in International Business

• Product Origin laws frequently determine duties and


tariffs to be paid. This is more and more difficult to
determine with globalization.
• Competition laws, like antitrust regulations and
insider trading laws vary widely from country to
country.
• Marketing and Distribution laws that determine
allowable practices vary widely.
• Product Liability laws determine liability and
allowable damages for product safety. These vary
widely. …/…
Legal Issues in International Business

• Treaties determine some business practices.


• Patent and Trademark Laws protect intellectual
property and rights to proprietary technologies.
These also vary widely.