Political and Legal Environments Facing Business

Objectives
To discuss different functions that political systems perform To compare democratic & totalitarian political regimes & discuss how they can influence managerial decisions

To describe how management can formulate & implement strategies to deal with foreign political environments
To examine major legal issues in IB

Political & legal Influences on International Business

EXTERNAL INFLUENCES PHYSICAL AND SOCIETAL FACTORS Political policies and legal practices Cultural factors Economic forces Geographical influences OPERATIONS OBJECTIVES
Basic political ideologies Impact of the political system on management decisions Formulating and implementing political strategies Legal environment

STRATEGY

COMPETITIVE ENVIRONMENT

MEANS

The Political Environment (1)

The role of the political system is to integrate the society into a viable, functioning unit Influences how business is conducted

Example: the political change that resulted in Hong Kong when China took control in 1997 worried many managers because they believed that China would change the relationship btwn govt & business, with the govt exerting more influence & control in business

The Political Environment (2)

Political process functions Interest articulation Interest aggregationthe collection of interests in the political system Policy making Policy implementation and adjudication

Basic Political Ideologies

Basic Political Ideologies (1)

Political ideology a body of constructs, theories & aims that constitute a sociopolitical program Example: liberal ideology of Democratic Party, conservative ideology of Republican Party in US Pluralist society different ideologies coexist because there is no one ideology accepted by all --difficult to understand the political environment in a pluralist society Example: manager from US, where there are only 2 political parties might find it difficult to understand the political environment in a country where there are many different ideologies even within the political parties themselves

Basic Political Ideologies (2)

Ultimate test of any political system is its ability to hold a society together despite pressures from different ideologies

More different & strongly held are the ideas, more difficult will be for the govt to formulate policies, acceptable to all Example: different ideologies in countries as Yugoslavia & Soviet union broke these countries apart during 1990s Ideologies also help bring countries together Example: Because of strong ethnic ties btwn Taiwan & China, Nike uses Taiwanese shoe manufacturers to invest in China & to manufacture shoes using Chinese Labour

A Political Spectrum (1)

Democracyinvolves wide participation by citizens in the decision-making process Freedom of opinion, expression, press Limited term of elected officials Independent and fair court system Accessibility to the decision-making process

A Political Spectrum (2)

Democratic governments differ:

Presidential versus parliamentary

Number of important political parties Amount of citizen participation in decision making

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A Political Spectrum (3)

Totalitarianisma single party, individual, or group of individuals monopolizes political power Neither recognizes nor permits opposition Theocraticreligious leaders are political leaders Seculargovernment often imposes order through military power

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Impact of the Political System on Management Decisions

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Impact of the Political System on Management Decisions (1)

Political Risk caused by political instability Promotes fear that operating position will deteriorate Tends to be higher in totalitarian regimes Other ways also by which political risk can affect a company Example: During the period of apartheid in South Africa, many US companies with investment in South Africa faced boycotts in US by groups that were morally opposed to apartheid

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Impact of the Political System on Management Decisions (2)

Causes of political risk Change in the opinions of political leadership Civil disorder stemming from economic conditions, human rights violations, or group animosity Example: In Argentina, in 2001, during the height of its economic crisis, when govt froze withdrawals from bank accounts to prevent complete depletion of cash from the banking sector, groups of street protestors & rioters targeted & attacked many foreign owned banks External relationsanimosity between host country and foreign investors country
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Impact of the Political System on Management Decisions (3)

Types of political risk Micropolitical actions are aimed at specific foreign investments Example: after US bombing of Afghanistan in October 2001, anti- American protestors in Afghanistan burned a KFC restaurant, McDonalds restaurant & a Shell gas station Macropolitical actions affect a broad spectrum of foreign investors Example: after the communist revolution in Cuba, the takeover of property was aimed at all foreign investors regardless of industry or nationality

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Formulating and Implementing Political Strategies

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Formulating and Implementing Political Strategies (1)

Formulating political strategies is even more complicated than formulating competitive marketplace strategies
Managers must know how decisions are made that could influence their ability to operate Managers must also know the rules for influencing political decisions

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Formulating and Implementing Political Strategies (2)

Establishing a political strategy in the host country Identify the issue what is the specific issue facing a firm- trade barriers, environmental standards, workers right? Define the political aspect of the issue does the govt feel strongly about the issue, or is it of minimal concern? Is there a political dimension to the issue or can it be dealt outside the scope of politics?

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Formulating and Implementing Political Strategies (3)

Assess the potential political action of other companies and special-interest groups Who are the parties that are affected & able to generate political pressure? What are their strategies likely to be?
Identify important institutions and key people Are they regulatory agencies, courts, legislatures?

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Formulating and Implementing Political Strategies (4)

Formulate strategies What are the key objectives, major alternatives & likely effectiveness of alternative strategies? Determine the impact of implementation What will be the public reactions in the home & host countries if the action taken is unpopular? Select the most appropriate strategy and implement

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Legal environment

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Legal environment
Managers must be aware of: Legal systems in countries in which they operate Degree of independence of judiciary from political process

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Legal Issues in International Business (1)

Affects many aspects of IB National laws may affect both domestic & foreign companies operating within the countrys borders health and safety standards employment practices antitrust prohibitions contractual relationships environmental practices patents and trademarks Example: the maximum workweek in Thailand is 84 hours & that applies to domestic & foreign firms
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Legal Issues in International Business (2)

May govern cross-border activities investment of capital payment of dividends to foreign investors customs and duties on imports

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