Business Environment

Political Institutions

Ms. Reem Quashem

Introduction
• International Business is more complicated than
domestic businesses as countries differ in many
ways.
• There are different political, economical and
legal systems which varies depending on the
level of economic development
• Cultural practices vary as well including
education and skill level of population.
Institution based view
• Opportunism
▫ Act of seeking self-interest with guile
▫ In other words it is the conscious policy and
practice of talking selfish advantage of
circumstances – with little regard for principles,
or with what the consequences are for others
▫ Examples include misleading, cheating and
confusing other parties in a transaction
Political Systems
• Political system refers to the rules of the game
on how a country is governed politically.
▫ Businesses interact with political system only
indirectly, yet business persons need to
understand the political system because it shapes
the commercial rules and regulations for the
business
• It can be major source of risks
Types of Political System
• Democracy
▫ It is a political system in which governments derive their
legitimacy from their election by their citizens.
 Provides individuals right to freedom of expression, opinion and
organization
 Free media
 Regular elections in which all eligible citizens are allowed to vote
 Universal adult suffrage (providing rights to minors)
 Limited terms
 Fair court system
 Nonpolitical state bureaucracy
 Nonpolitical police force
 Free access to state information
Political systems
• Totalitarianism (or dictatorship)
▫ It is a political system in which one person or party exercises
absolute political control over the population
▫ An important ideology supporting totalitarian regimes has been
communism which had been embraced throughout Central and
Eastern Europe and the former Soviet Union until the late 1980’s
▫ It is still the official ideology in China, Cuba Laos, North Korea
and Vietnam
 Communist totalitarianism
 Theocratic totalitarianism
 Tribal totalitarianism
 Right-w ing totalitarianism
Political Systems
• Individualism (16th century Protestant trading nations)
▫ Opposite of collectivism
▫ Individual should have the freedom in his or her economic and political pursuits
▫ Interests of the individual should take precedence over the interests of the state
▫ Provides freedom of self expression and welfare of society is best served by letting people
pursue their own economic self interest.

• Collectivism
▫ A political system that stresses the primacy of collective goals over individual goals
▫ The needs of the society as a whole are generally viewed as being more important than
individual freedoms

• Socialism
▫ Traced back to Karl Marx (1818-1883). He believed that if the state owned the means of
production, the state could ensure the workers were fully compensated for their labor
Why Political System matters to
International Business?
• Political system determines who sets the rules, and
whose interest may be reflected in the rules.
▫ For example in centralized country such as France or the
UK, the regulations and taxation rates tend to be uniform
across the country, while decentralized countries such as
the USA may have considerable variations that require
adaptation even within the country
• Political systems also determine where and how
businesses may be able to influence legislative processes
through lobbying (mostly legal) or corruption (usually
illegal)
Why Political System matters to
International Business?
• They influence how frequently the rules of the game for
business are changed, a major source of political risk
▫ It is the risks associated with political changes that may
negatively impact on domestic and foreign firms
Economic System
• Economic System refers to the rules of the game on
how a country is governed economically
• There are three types of economic system: Pure
market economy, command economy, and mixed
economy
• Pure market economy is characterized by the ‘invisible
hand’ of the market forces first noted by Adam Smith
in 1776. The government takes the hands off approach
known as laissez faire. All factors of production are
privately owned and individuals are free to engage in
all sorts of contracts as long as they pay taxes.
Economic System
• Pure command economy is defined by a government
taking, in the words of lenin, the ‘commanding heights’.
An economy in which all factors of productions are
government- or state-owned and controlled, and all
supply, demand and pricing are planned by the
government
• Historically many countries in the 19th century came
close to pure market economy like UK, and USA.
However, no country have ever achieved pure market
economy.
• Similarly country have ever achieved a pure command
economy.
Economic System
• Mixed economy is where element of both market
economy and command economies exist, where
although most of the factors of production are
privately owned, there is still some government
intervention exists.
Varieties of Capitalism Views
• A scholarly view suggesting that economies have
different inherent logics on how markets and other
mechanisms coordinate economic activity
• A Liberal Market Economy is where the coordination
happens predominantly by companies reacting to price
signals of the market.
▫ Companies are predominantly financed by issuing share
that are traded on the stock exchanges
▫ labour markets are flexible and employees enjoy relatively
little job protection
▫ Countries such as USA, UK and Australia
Legal Systems
• Legal Systems
• Rules of the game on how a country’s laws are enacted and
enforced
• Civil law
▫ A legal tradition that uses comprehensive statutes and
codes as a primary means to form legal judgments.
• Common law
▫ A legal tradition that is shaped by precedents and traditions
from previous judicial decisions.
• Case law
▫ Rules of law that have been created by precedents of cases
in court.
Legal Traditions
Property Rights
Property
• Property rights is the legal rights to use an traditionally
refers to tangible
economic property (resource) and to pieces of
property
derive income and benefits from it. (such as land).

• Intellectual property rights are the rights Intellectual

property
associated with the ownership of specifically
refers to
intellectual property intangible
property
Intellectual Property rights
• Patents
▫ Legal rights awarded by government authorities to
inventors of new technological ideas, who are given
exclusive (monopoly) rights to derive income from such
inventions through activities such as manufacturing,
licensing, or selling
• Copyrights
▫ The exclusive legal rights of authors and publishers to
publish and disseminate their work (such as this book, a
photo or a piece of software
• Trademarks
▫ Exclusive legal rights of firms to use specific names, brands
and designs to differentiate their products from others
Corporate Governance
• It s the rules by which shareholders and other
interested parties control corporate decision making
▫ The rules of corporate governance control corporate
decision makers (typically managers)
▫ The role is to distribute the rights and responsibilities
among different participants in the corporation, such
as the board, managers, shareholders and other
stakeholders and spells out the rules and procedures
for making decisions
▫ It is important because it ensures that managers act in
the best interest of the firm, rather than their
personal interest