Class 6-7 Class 6-7 The context of business- government relations: legal, political and social environment March 10 St-Petersburg State University Graduate.

Class 6-7Class 6-7 The context of business-government relations:

legal, political and social environment

March 10

St-Petersburg State University Graduate School of Management

Master of International Business Program Business-government relations

Business environment in modern advanced market

economies

Features of successful market economies (1)

1. Rule of law

“This means that government in all its actions is bound by rules fixed and announced beforehand – rules which make it possible to foresee with fair certainty how the authority will use its coercive powers in given circumstances” (Hayek, 1977)


2. Private ownership

The means of production are predominantly privately owned.

Since 1970th – global privatization process in developed, developing and especially in transition economies


3. Competition

Is the key ingredient for achieving productivity advances in the private sector

Market liberalization (for ex. telecommunications, trade)


4. Sound currency, savings, financial intermediation and capital accumulation

Low rate of inflation, adequate level of voluntary savings, competitive financial system, developed financial institutions


5. Individual liberty and role of government

- freedom in accordance with constitutional democracy

- social mobility - free exchange and free choice - restrictions on government intervention. Buchanan (1994): The range and the scope of

democratic authority should be limited, “big” and arbitrary governments pose a threat to individual liberties, including the freedom to run one’s own business.

- predictability of government policies and actions


6. Stable political and social institutions

- stable democratic system (Giersch, 1990)

- establishment of a system of social safety nets (Sweden, Finland)

- political units should be homogeneous enough to support a sense of shared purpose and to ensure that elected governments have a real chance of maintaining legitimacy

Political environment

Political system

A political system is a system of politics and government. It is usually compared to the law system, economic system, cultural system, and other social systems.

A political system is a complete set of institutions, interest groups (such as political parties, trade unions, lobby groups), the relationships between those institutions and the political norms and rules that govern their functions (constitution, election law).

Ideological continuums

Free marketcapitalism

Regulatedcapitalism Mixed Socialism

Utopiancommunism

ECONOMIC IDEOLOGY

POLITICAL IDEOLOGY

SOCIAL IDEOLOGY

AnarchyNegotiatedconsensus

Simpledemocracy

Republicdemocracy

Socialdemocracy

Totalitarian-ianism

Individualism Collectivism

Ideology – is the systematic and integrated body of constructs, theories, and aims that constitute a sociopolitical program

Types of government

Monarchy - Rule by an individual who has inherited the role and expects to bequeath it to their heir.

Despotism - Rule by a single leader, all his or her subjects are considered his or her slaves.

Dictatorship - Rule by an individual who has full power over the country. See also Autocracy and Stratocracy.

Oligarchy - Rule by a small group of people who share similar interests or family relations.

Plutocracy - A government composed of the wealthy class.

Democracy - Rule by a government where the people as a whole hold the power. It may be exercised by them (direct democracy), or through representatives chosen by them (representative democracy).

Theocracy - Rule by a religious elite. Anarchy - A lack of government.

Forms of government

Monarchy - is a form of government in which supreme power is absolutely or nominally lodged in an individual, who is the head of state, often for life or until abdication, and “is wholly set apart from all other members of the state”.

Absolute Constitutional

Republic - is a state or country that is not led by a hereditary monarch but in which the people have an impact on its government.

Constitutional Parliamentary Federal republic, Confederation or Federation Islamic republic People’s republic Democratic republic

Types of government in the world

The role of political system

• The major role of the political system is to integrate the society

• Political system dedicates how business is conducted both domestically and internationally

• The political system is influenced by forces from within and outside a country

Functions of political process:

• Interest articulation

• Interest aggregation

• Policy making

• Policy implementation and adjudication

Political risk

• Political Risk (www.beri.com / www.prsgroup.com / www.businessmonitor.com )

– Nationalism/Free Market/Military/Totalitarian– Incentives or Disincentives for FDI– Tariff and Non Tariff Barriers– Ownership Risk– Operating Risk– Political Stability– Managing Risk through Bribery & Corruption– …

Macro-level political risk / Micro-level political risk

http://www.beri.com/

http://www.prsgroup.com/

http://www.businessmonitor.com/

Freedom House world map

Free Partly Free Not Free

Legal environment

What is law? (different notions)

• The law consists of rules that regulate the conduct of individuals, businesses, and other organizations within society.

• It is intended to protect persons and their property from unwanted interference from others. The law forbids persons from engaging in certain undesirable activities.

• That which must be obeyed and followed by citizens subject to sanctions or legal consequences.

• A body of rules of action or conduct prescribed by controlling authority, and having binding legal force.

Functions of law

• Keeping the peace– Including making certain activities crimes

• Shaping moral standards– e.g., enacting laws that discourage drug and alcohol abuse

• Promoting social justice– e.g., enacting statutes that prohibit discrimination in employment

• Maintaining the status quo– e.g., passing laws preventing the forceful overthrow of the government

• Facilitating orderly change– e.g., passing statutes only after considerable study, debate, and public

input• Providing a basis for compromise

– e.g., approximately 90 percent of all lawsuits are settled prior to trial• Facilitating planning

– e.g., well-designed commercial laws allow businesses to plan their activities, allocate their resources, and assess their risks

• Maximizing individual freedom– e.g., the rights of freedom of speech, religion, and association

Legal Differences and Restraints

Countries differ in their laws as well as in their use of the law. Legal systems worldwide:– Common Law: Based on tradition and dependent

upon precedent and custom (US, United Kingdom, most of former English colonies).

– Code Law: Based on a comprehensive set of written statutes (European continent, Latin America, Japan).

– Theocratic Law: Based on religious precepts, such as Islamic law.

Common and code law

• Common law seeks “interpretation through the past decisions of higher courts which interpret the same statues or apply established and customary principles of law to a similar set of facts.”

• Under code law the legal system is generally divided into three separate codes:– Commercial – Civil– Criminal

• Common law is recognized as not being all-inclusive, whereas code law is considered complete as a result of catchall provisions found in most code-law systems.

• Under common law, ownership is established by use; under code law, ownership is determined by registration.

Islamic law

• The basis for the Islamic law is interpretations of the Koran.

• Islamic law defines a complete system that prescribes specific patterns of social and economic behavior for all individuals.– Property rights– Economic decision making– Types of economic freedom

• Among the unique aspects of Islamic law is the prohibition against the payment of interest.

• The Islamic system places emphasis on the ethical, moral, social, and religious dimensions to enhance equality and fairness for the good of society.

Key legal issues in international business

• Trade and investment regulation

• Intellectual property protection

• Financial flows regulation

• Taxation

• Reporting requirements

• Ownership regulation

• Contractual relationships

• International treaties

• Dispute resolution

Key legal issues in international marketing

– Consumer Protection (buyer behaviour)– Health & Safety (product)– Anti dumping (pricing)– Contract & Employment Law (relationships)– IPR Law (Patent-Trademark-Copyright)– Monopoly and Company Law– Advertising and Marketing Controls

The effect of legal, political and regulatory institutions (1)

1. Autonomous central bank, financially sound commercial banks, other financial intermediaries, and market-oriented supervisory agencies

2. Tax regulation 3. Institutions, regulations and policies

related to well-functioning labor market

4. No matter how wise legislation may be, unless it is enforced, it is worthless.

The effect of legal, political and regulatory institutions (2)

5. Competition law seeks to ensure that vertical integration, horizontal merges, take-overs and joint ventures do not damage the public interest

6. Corporate law encompasses bankruptcy provisions, enterprise restructuring rules and liquidation procedures, all of which contribute to the recycling of failed assets (individual interest)

7. A complex set of local, national and international institutions influence the extent to which international trade and capital flows contribute to investment and to the spread of new ideas and technologies

Economics of property rights

Property rights

The property rights are the authorized behavioural relations (norms) between people concerning use of the rare resources (tangible and intangible).

Adjust access to rare resources.

Property rights - is the system of restriction (exception) of access to resources.

Property rights

• From the point of view of a society the property right - rules of the game which order relations between separate agents (the objective property rights)

• From the point of view of the individual, property rights – “bundle” of competences to decision-making concerning this or that resource. Each competence has utility (the subjective property rights)

• The property are treated as the relation between people, instead of as the relation " the person - a thing "

• The concept of the property rights contacts the central problem of an economic science - a problem of a rarity as the establishment of the property rights is meaningful only concerning rare resources

Influence of property rights on incentives

• Ownership which is clearly defined and legally recognized

• State-owned enterprises versus private firms

• Privatization

• Reforming the public sector

• Protecting intellectual property rights

• Allocating environmental costs

• Maintaining safety standards

What does the specification of property rights mean?

Exact definition of:

• The subject of the right

• Borders of object of the property right

• Set of competences which the subject has

• Ways of investment of the property right

• Protection of the property right

Property rights

• The property rights can be protected by the state and other special mechanisms - customs, moral installations, religious precepts

• The property rights have behavioral value - they encourage one ways of behaviour, and suppress others

• The set of powers fixed for a resource influences its value

• Any act of an exchange is an exchange of “bundle” of competences (“bundle” of different rights)

• Observance and infringement of the authorized behavioural norms is the act of a rational economic choice. The non-authorized behaviour is understood economically: interdictions and restriction do not eliminate it, and operate as negative stimulus, raising it’s costs (punishment)

“Bundle” of the rights

- the right to net income

- the right to sell all or the part of the property

- the right to use for some desired end

Forms of property rights specification

• Formal (by the government institutions)

• Independent specification and protection of the property rights by economic agents

Why is specification important?

The better specified the property rights and are more reliably protected, the more big value they represent

Attenuation of property rights

Takes place when property rights are:– inexact established,

– badly protected,

– or fall under different sorts of restriction

Attenuation of property rights

• Attenuation of the property rights means, that costs under their specification and protection are very high.

• The specification of the property rights should go up to a limit when the further prize from overcoming of attenuation does not pay back the expenses of overcoming.

• The degree of the specification should correspond to a degree of a rarity of resources.

Forms of ownership

Private ownership

Forms of ownership

Social

State

Public bodies

Workers as owners

Common-pull resources (CPR):

-Open access CPR

-Close-access CPR

Private ownership

Private goods or resources are excludable and rival

All but the proprietor or persons to whom he has transferred or delegated the competences are excluded from access to a resource. The proprietor himself decides how to use and on what conditions to transfer his competences

Advantages of private ownership

• Exclusiveness of the right

• Freedom of an exchange, absence of restrictions on sale and transfer of competences

• Opportunity to divide the “bundle” of different rights

• Expansibility

Shortcomings of private ownership

!!! High costs of specification

It is impossible to distribute private ownership to all resources

State ownership

• Access to resources is regulated by interests of a society

• As individuals all are excluded from access to resources

• Co-owners of a state ownership (tax-payers):– do not possess the individual exclusive rights, cannot

sell or transfer the share of participation in it– cannot evade from possession of it (not voluntary

character of participation in possession of resources), from the maintenance of a state ownership (payment of taxes)

• Competences – belong to the state bodies’ representatives

Advantages of state ownership

• Can be the most effective form for organization of public goods production (for example, safety, national defense, etc.)

• It is impossible to make the contract of all citizens with private firms on maintenance, for example, defense. Such contract would badly give in to the control and a legal protection

Shortcomings of state ownership (1)

• Impossibility to sell or transfer the share of participation in a state ownership, replacement of voluntary forms of co-operation compulsory

• Absence of correlation between individual co-owners behaviour and results of the state property use:– Encourages behaviour, benefits from which get to

one participant of group, and costs are distributed among all

– Weakens stimulus to decision-making according which costs are paid by one, and benefits are shared between all

Shortcomings of state ownership (2)

• Weakness of the control over those who have competences

• Collective interest is more difficult for determining than individual (a problem of interests coordination)

• Politization of decision-making process (predominance of noneconomic purposes)

Common-pool resources

• Open-access resources (Nobody has any authorized property rights to the given resource (air or space)

• Close-access resources (The communal, collective property which belongs to certain group of persons (for example, high-mountainous meadows in the Swiss, Austrian, Bavarian Alps). Members of group have the right to exclude not members.

Examples of common resources

• Clean air and water

• Oil pools

• Congested roads

• Fish, whales, and other wildlife

Advantages of common-pool resources

• Minimization of maintenance costs.

• The system of the common property takes place, where the costs of specification and protection of the individual property rights are extremely high

• Interferes with monopolies formation

Shortcomings of common-pool resources

• Reduction of investments, prevalence of labour-consuming technologies, lower labour productivity, high costs opportunistic behaviour, restriction at decision-making

• Costs of common property system are great and increase at increase in number of users

• Common property generates externalities (tragedy of commons)

• Instability of system

Intellectual property rights issues

Intellectual property issues

• Intellectual property (IP) are legal property rights over creations of the mind, both artistic and commercial, and the corresponding fields of law. Under intellectual property law, owners are granted certain exclusive rights to a variety of intangible assets, such as musical, literary, and artistic works; ideas, discoveries and inventions; and words, phrases, symbols, and designs.

Intellectual property issues:information and incentives

$

Length of the monopoly

Incentives to createthe idea

Benefits from others’use of idea

Weaker appropriability

Intellectual property issues: appropriability of returns

weak appropriability

moderate

appropriability

moderate appropriability

strong

appropriability

Low High

Loose

Tight

Cost of replication

IntellectualProperty

Protection(rights and enforcement)

Piracy rates

Intellectual property protection

• Patents

• Copyright

• Trademarks and trade secrets

Social environment

Social issues

• Age and gender

• Income distribution, inequality, poverty

• Education

• Public health

• Cultural background, mentality

• Civil liberties and human rights

• …

Hofstede’s framework for assessment of cultures

• Low vs. high power distance – Degree to which influence/control are unequally

distributed among individuals within a particular culture

• Uncertainty avoidance– Degree to which members of a society attempt

to avoid ambiguity, riskiness, and indefinitenessof future

• Individualism – Extent to which society expects people to take

care of themselves and their immediate families – And/or the degree to which individuals believe

they are masters of their own destiny

Hofstede’s framework (cont.)

• Vs collectivism – Measures tendency of group members to focus

on the common welfare and feel loyalty toward one another

• Masculinity vs. femininity – refers to the value placed on traditionally male

or female values (as understood in most Western cultures)

• Long term vs. short term orientation– describes a society's "time horizon," or the

importance attached to the future versus the past and present

Social intermediaries

• Social movements

• Activist groups

• NGOs

• Mass media

The mass media and the environment of business

Issues And

Events

News Media Coverageand treatment

The public

Interest groups

Public officeholders

Market and nonmarket Action that shapes the

environment of business and affects issue lifecycles

Messagesinformation

The role of activist groups

Activist group

Issue andtarget

News media

Events

Coverage and treatment

People’s sentiment

The public

Interestgroups

Actions:Boycotts

Collective actionGovernment action

framing

Societal significance

Audience interest

Moral concerns andpreferences

Messages

Low-cost source of info

staging

Protests, demonstration, political action

Positioning in nonmarket environment

Integrating market and nonmarket strategies

• Market and nonmarket strategies development as one process

• Market and nonmarket strategies can be viewed as separate

• Incorporation of both strategies into business strategy process

Nonmarket positioning

• Provides a foundation for nonmarket strategy

• Affects the set of nonmarket issues that firm faces

Nonmarket positioning spaces

• The space of public sentiment

• Political space

• Legal space

Nonmarket positioning spaces

Nonmarket assets contributng to value creation:

• Expertise in dealing with government, news media, interest and activist groups, and the public

• Knowledge of the procedures, and functioning of the institutions

• Reputation for responsible actions

Case on nonmarket positioning:

Exclusive Resorts: entrepreneurial positioning and nonmarket defense.

Class 6-7 Class 6-7 The context of business- government relations: legal, political and social environment March 10 St-Petersburg State University Graduate.

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