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Copyright @ Oxford University Press Copyright @ Oxford University Press International Business R. M. JoshiInternational Business R. M. Joshi

Chapter 8: Political and Legal Chapter 8: Political and Legal EnvironmentEnvironment

International BusinessInternational Business

Rakesh Mohan Joshi Rakesh Mohan Joshi

Professor & Chairperson, IIFT New DelhiProfessor & Chairperson, IIFT New Delhi

1



POLITICAL ANDPOLITICAL AND

LEGAL ENVIRONMENTLEGAL ENVIRONMENT

Chapter 8



LEARNING OBJECTIVESLEARNING OBJECTIVES

To explain the significance of the political and To explain the significance of the political and

legal environment in international businesslegal environment in international business

To discuss various forms of political systems To discuss various forms of political systems

To explicate different types of legal systems To explicate different types of legal systems

To elaborate principles of international lawTo elaborate principles of international law

To elucidate risks in international businessTo elucidate risks in international business

To explain methods of measuring and To explain methods of measuring and

managing risks managing risks



An international firm needs to operate in An international firm needs to operate in

countries having diverse political and legal countries having diverse political and legal

frameworks that, at times, conflict with its home frameworks that, at times, conflict with its home

country. Value judgments made from the country. Value judgments made from the

perspective of the home country considerably perspective of the home country considerably

hinders objective decision-making in the diverse hinders objective decision-making in the diverse

international scenario. Therefore, a thorough international scenario. Therefore, a thorough

conceptual understanding of political and legal conceptual understanding of political and legal

environments affecting international business environments affecting international business

operations is needed. operations is needed.

Significance of understanding International Political & Legal Environment



INTERNATIONAL POLITICAL ENVIRONMENTINTERNATIONAL POLITICAL ENVIRONMENT

The political environment of the country of The political environment of the country of

operation becomes increasingly important for an operation becomes increasingly important for an

internationalizing firm as it moves from exports internationalizing firm as it moves from exports

to foreign direct investment (FDI). Cordial to foreign direct investment (FDI). Cordial

political relations between the firm’s home political relations between the firm’s home

country and the host countries have a direct country and the host countries have a direct

favourable impact on its foreign operations. As a favourable impact on its foreign operations. As a

firm expands internationally and begins to firm expands internationally and begins to

operate in multiple countries, the political and operate in multiple countries, the political and

legal issues become increasingly complex. legal issues become increasingly complex.



Political SystemPolitical System

It comprise of various stakeholders, such as It comprise of various stakeholders, such as the government, political parties with the government, political parties with different ideologies, labour unions, religious different ideologies, labour unions, religious organizations, environmental activists, and organizations, environmental activists, and various NGOs. various NGOs.



Political IdeologyPolitical Ideology

A set of ideas or beliefs that people hold A set of ideas or beliefs that people hold

about their political regime and its about their political regime and its

institutions about their position and role in institutions about their position and role in

it. it.



Types of government: economic Types of government: economic systemssystems

Communism:Communism: Form of government based on the Form of government based on the concept of a classless society where all the major factors of concept of a classless society where all the major factors of production are owned by the government and shared by all production are owned by the government and shared by all the people rather than profit-seeking enterprises, for the the people rather than profit-seeking enterprises, for the benefit of the society.benefit of the society.

SocialismSocialism:: A form of government where basic and heavy A form of government where basic and heavy industries are operated by the government so as to ensure industries are operated by the government so as to ensure social welfare objectives wherein small businesses may be social welfare objectives wherein small businesses may be privately owned.privately owned.

CapitalismCapitalism: : An economic system which provides An economic system which provides complete freedom of private ownership of productive complete freedom of private ownership of productive resources and industries.resources and industries.



Types of government: political Types of government: political systemssystems

Democracy: Democracy: Government by the people where Government by the people where citizens are directly involved in decision citizens are directly involved in decision making.making.Totalitarianism:Totalitarianism: Dictatorial form of Dictatorial form of centralized government, usually in the hands of centralized government, usually in the hands of a dictator who regulates every aspect of the a dictator who regulates every aspect of the state. Various forms of totalitarianism include:state. Various forms of totalitarianism include:

• Secular totalitarianismSecular totalitarianism• Fascist totalitarianismFascist totalitarianism• Authoritarian totalitarianismAuthoritarian totalitarianism• Communist totalitarianismCommunist totalitarianism• Theocratic totalitarianismTheocratic totalitarianism



Types of government: structureTypes of government: structure ParliamentaryParliamentary:: The government consults The government consults

its citizens from time to timeits citizens from time to time and the and the parliament has power to formulate and parliament has power to formulate and execute laws.execute laws.

Commonwealth CountriesCommonwealth Countries: : Countries Countries representing constitutional monarchies representing constitutional monarchies which recognize Queen Elizabeth II as head which recognize Queen Elizabeth II as head of the sate over an independent of the sate over an independent government.government.



•Monarchies: Countries that have monarchs as the

heads of government. There may be either

constitutional or absolute monarchies.

•Theocracy: The rule of god where the civil leader is

believed to have a direct personal connection with god.



Trade Embargos: Trade Embargos: Prohibiting trade Prohibiting trade

completely with a country so as to completely with a country so as to

economically isolate it and apply political economically isolate it and apply political

pressure on its government.pressure on its government.

Trade Sanctions:Trade Sanctions: Imposing selective Imposing selective

coercive measures to restrict trade from a coercive measures to restrict trade from a

country .country .



Bureaucracy:Bureaucracy: Form of administration based Form of administration based

on hierarchical structure governed by a set of on hierarchical structure governed by a set of

written rules and established procedures. written rules and established procedures.

The term is often used to describe inefficient The term is often used to describe inefficient

and obstructive administrative process and and obstructive administrative process and

red-tapism.red-tapism.

Terrorism:Terrorism: Systematic use of violence to Systematic use of violence to

create fear in general public with an create fear in general public with an

objective to achieve a political goal or convey objective to achieve a political goal or convey

a political message.a political message.



INTERNATIONAL LEGAL ENVIRONMENTINTERNATIONAL LEGAL ENVIRONMENT

Firms operating internationally face major Firms operating internationally face major

challenges in conforming to different laws, challenges in conforming to different laws,

regulations, and legal systems in different regulations, and legal systems in different

countries. International mangers need to countries. International mangers need to

understand the types of legal systems followed understand the types of legal systems followed

in the countries of their operations before in the countries of their operations before

entering into legal contracts.entering into legal contracts.



Judicial Independence and Judicial Independence and EfficiencyEfficiency

A fair judicial system also reduces A fair judicial system also reduces

political risks in overseas markets. The political risks in overseas markets. The

level of judicial independence and level of judicial independence and

efficiency differs widely among efficiency differs widely among

countries. countries.



International Legal SystemsInternational Legal Systems



Common LawCommon Law: : Law based on traditions, past Law based on traditions, past

practices, and legal precedents set by the courts practices, and legal precedents set by the courts

through interpretation of statutes, legal legislations, through interpretation of statutes, legal legislations,

and past rulings. It depends less on written statutes and past rulings. It depends less on written statutes

and codes. and codes.

Common law originated from England and it is Common law originated from England and it is

followed in most of the former British colonies, such followed in most of the former British colonies, such

as India, United Kingdom, the United States, Canada, as India, United Kingdom, the United States, Canada,

Australia, and New Zealand. Australia, and New Zealand.



Civil LawCivil Law:: LawLaw based on a based on a

comprehensive set of written statutes. It comprehensive set of written statutes. It

is derived from the Roman law and is is derived from the Roman law and is

followed in most of continental Europe, followed in most of continental Europe,

Japan, and Latin America. Japan, and Latin America.



Socialistic Law: Socialistic Law: Socialist law traditionally Socialist law traditionally

advocates ownership of most property by the advocates ownership of most property by the

state or state-owned public enterprises, state or state-owned public enterprises,

prohibiting free entry to foreign firms. prohibiting free entry to foreign firms.

This law is derived from the Marxist socialist This law is derived from the Marxist socialist

system and continues to influence legal system and continues to influence legal

framework in former communist countries, such as framework in former communist countries, such as

the CIS, China, North Korea, Vietnam, and Cuba. the CIS, China, North Korea, Vietnam, and Cuba.



Theocratic Law: Theocratic Law: The legal system based The legal system based

on religious doctrine, precepts, and on religious doctrine, precepts, and

beliefs. For instance, the Hebrew law and beliefs. For instance, the Hebrew law and

the Islamic law are derived from religious the Islamic law are derived from religious

doctrines and their scholarly doctrines and their scholarly

interpretations. interpretations.



Principles of International LawPrinciples of International Law

International law is less coherent International law is less coherent

compared to domestic law since it compared to domestic law since it

embodies a multiplicity of treaties and embodies a multiplicity of treaties and

conventions besides the laws of conventions besides the laws of

individual countries. individual countries.



Principle of SovereigntyPrinciple of Sovereignty

International JurisdictionInternational Jurisdiction

• Nationality PrincipleNationality Principle

• Territoriality PrincipleTerritoriality Principle

• Protective PrincipleProtective Principle

Doctrine of ComityDoctrine of Comity

Act of State DoctrineAct of State Doctrine

Treatment and Right of AliensTreatment and Right of Aliens

Forum for Hearing and Setting DisputesForum for Hearing and Setting Disputes

Principles of International LawPrinciples of International Law



United Nations Commission on United Nations Commission on International Trade Law (UNCITRAL)International Trade Law (UNCITRAL)

Established in 1966, UNCITRAL aims to Established in 1966, UNCITRAL aims to

reduce and harmonize and unify the laws reduce and harmonize and unify the laws

of international trade. of international trade.



RISKS IN INTERNATIONAL BUSINESSRISKS IN INTERNATIONAL BUSINESS



Commercial Risks:Commercial Risks:

Risks such as non-acceptance of Risks such as non-acceptance of

goods, non-payment or insolvency of goods, non-payment or insolvency of

the importer.the importer.



Economic Risks:

Restrictions imposed on business activities on the

grounds of national security, conserving human

and natural resources, scarcity of foreign

exchange, to curb unfair trade practices and to

provide protection to domestic industries.



Political Risks:Political Risks:

Possibility of political decisions, events, Possibility of political decisions, events,

or conditions in an overseas market or or conditions in an overseas market or

country that adversely affect the country that adversely affect the

international business that include international business that include

confiscation, expropriation, confiscation, expropriation,

nationalisation, and domestication.nationalisation, and domestication.



BERI IndexBERI Index

It provides risk forecasts for about 50 It provides risk forecasts for about 50

countries throughout the world and a countries throughout the world and a

broad assessment of the country’s broad assessment of the country’s

business climate on 15 economic, political, business climate on 15 economic, political,

and financial factors on a scale from zero and financial factors on a scale from zero

to four. to four.



EIU’s Risk IndicesEIU’s Risk Indices

It monitors operational risks for 150 countries on It monitors operational risks for 150 countries on

a scale of 0 to 100. The overall score includes an a scale of 0 to 100. The overall score includes an

aggregate of ten categories of risks, such as aggregate of ten categories of risks, such as

security, political stability, government security, political stability, government

effectiveness, legal and regulatory, macro-effectiveness, legal and regulatory, macro-

economic, foreign trade and payments, financial, economic, foreign trade and payments, financial,

tax policy, labour markets, and infrastructure. tax policy, labour markets, and infrastructure.



Global Political Risk Index (GPRI)Global Political Risk Index (GPRI)

GPRI is a comparative index to monitor GPRI is a comparative index to monitor

political risks in 24 emerging markets, political risks in 24 emerging markets,

including India, China, Brazil, Russia, and including India, China, Brazil, Russia, and

South Africa. It serves as an ‘early warning’ South Africa. It serves as an ‘early warning’

system to anticipate critical trends and system to anticipate critical trends and

provides a measure for the country’s capacity provides a measure for the country’s capacity

to withstand political, economic, security-to withstand political, economic, security-

related, and social shocks. related, and social shocks.



Failed States IndexFailed States Index

The Failed States Index is a useful tool to carry out The Failed States Index is a useful tool to carry out

the cross-country comparison of the world’s the cross-country comparison of the world’s

weakest states. It uses 12 social, economic, weakest states. It uses 12 social, economic,

political, and military indicators and ranks on a political, and military indicators and ranks on a

scale of 0–120 to assess about 177 states in order scale of 0–120 to assess about 177 states in order

of their vulnerability to violent internal conflict and of their vulnerability to violent internal conflict and

societal deterioration. societal deterioration.



Managing Risks in International Managing Risks in International BusinessBusiness

Strategic Management of Political RisksStrategic Management of Political Risks• Employing localsEmploying locals• Sharing ownershipSharing ownership• Increasing perceived economic benefits to the Increasing perceived economic benefits to the

host country host country • Follow political neutralityFollow political neutrality• Assuring social responsibilityAssuring social responsibility• Adapting to local environmentAdapting to local environment

Insurance and GuaranteesInsurance and Guarantees• Export Credit Guarantee CorporationExport Credit Guarantee Corporation• MIGA’s guarantees against non-commercial MIGA’s guarantees against non-commercial

(political) risks(political) risks

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Business

political parties

political systemsdemocracy

political ideology

political pressure

international businessto

legal environmentcopyright

legal issues

cordial political relations