Gbm unit-05 (global political-legal environment)

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By :

Prof. Amit Kumar

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“A student pursuing management education from IILM-

Graduate School of Management, for example may find

himself or herself placed in a firm located in a totally

different country. Knowledge about international

business keeps the youngster mentally prepared to

accept assignment in an alien environment. Forewarning

is definitely forearming, for the fresh management

graduate”.

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Importance of this course

Global Business Management

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Course: Global Business Management

1. Globalization

2. Global Trade & Theory

3. Global Technological Environment

4. Global Economic Environment

5. Global Political-Legal Environment

6. Foreign Direct Investments

7. Regional Economic Integration

8. Strategy and Structure of International Business

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Global Business Management

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Global Business Management Global Political-Legal Environment

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Contents

• Environment of International Business• Political Systems- Democracy & Totalitarianism• Types of Political Risk & Assessment• Strategies for Managing Political Risks• Legal Environment-System of Law• International Dispute Resolution• Presentation on: Areas of Concern for MNCs

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• Political environment refers to the influence of the system of government and judiciary in a nation on international business.

• The type and structure of government prevailing in a country decides, promotes, fosters, encourages, shelters, directs & controls the business of that country.

‘A country with a stable and honest government ensures satisfactory state of economic

progress’.

Political Environment

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• The legal system refers to the rules and laws that regulate behaviour of individuals and organizations. Failure to comply with laws means that penalties will be inflicted by courts depending on the seriousness of offence.

• The legal system in a country is also influenced by its political system.

The government of a country defines the legal framework within which firms conduct business and

often the laws that regulate business reflect the rulers’ political ideology.

Legal Environment

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• Democracy refers to a political arrangement in which the supreme power is vested in the people.

• Democracy maintain stable business environments. The private sector enjoys ‘Freedom-DES’.

• Democracy does not guarantee economic growth. The so-called Asian Tigers, built strong market economies in the absence of democratic practices.

Across the world, 60% of the nations have functioning democratic systems, others are under

TOTALITARIANISM.

Political Systems- Democracy & Totalitarianism

Democracy

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• Individual freedom is completely subordinated to the power of authority of state and concentrated in the hands of one person or in a small group, which is not constitutionally accountable to the people.

• Societies ruled by a pressure clique- political, economic or military or by a dictator, plus most oligarchies and monarchies- belong to this category.


Totalitarianism

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• During the First & Second World Wars the authoritarian governments began to appear in most mature economies. Even after the Second War, the totalitarian system became most common in newly independent nations.

• Nazi Germany (under Adolf Hitler) and the former Soviet Union (under Joseph Stalin) are historic examples. Today, Cambodia, Myanmar, China, Cuba and Iraq are prominent examples.

• Many Latin American countries have registered impressive economic growth under the iron rule of military dictators. So is the case of Korea and fastest growing economy China.


Totalitarianism

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Types of Totalitarianism

1. Theocratic

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1. Theocratic

2. Secular

3. Tribal

4. Right-Wing Totalitarianism

• When a country’s religious leader are also its political leaders, the political system is called a theocracy.

• Religious leaders frame and enforce laws and regulations that are based on religious beliefs.

• Afghanistan, some Sheikhs of the Middle East and Iran are examples which have such a political dispensation.

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• A political system in which political leaders are guided by military and bureaucratic power is called secular.

• In such system, military controls the government and makes decisions which it deems to be in the best interest of the country. Like, Pakistan, Common throughout Latin America and Asian countries like South Korea, Singapore, Indonesia.

• Tribal totalitarianism occurs when a political party that represents interests of a particular tribe monopolizes power.

• This exists principally in African countries such as Zimbabwe, Tanzania, Uganda and Kenya.


3. Tribal

2. Secular

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• Here, private ownership of property is endorsed by government, market forces are also allowed free play, but political freedoms are rarely granted.

• Argentina, Brazil, Chile and Paraguay were under right-wing totalitarian governments in the late 1980s.


4. Right-Wing

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“ China is a classic example of polity which though communist

by the definition, is pursuing right-wing polices. The country is

privatizing state-owned enterprise, attracting FDI, pursuing

pro-business policies and is registering a hefty growth rate.

The country appears to be an open and free society, but is

essentially totalitarian”.

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• Political risk is any governmental action or politically motivated event that could adversely affect the long-term profitability or value of a firm.

• Corporate face political risk when they conduct business with outside world.

1. It is very high in countries like Yugoslavia, Turkey, Iraq, Sudan, Nigeria, Afghanistan, Somalia & Indonesia.

2. It is almost non-existent in the US, Canada, Australia and Western European countries.

3. Distinction is often made between macro and micro risks.

Political Risk

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Types of Political Risk

Macro Risks: (A macro political risk affects all the participants in international businesses in the same way.)

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RISKS IMPACT

1 Loss of technology or otherintellectual property

Loss of future profits

2 Campaigns against foreigngoods

Loss of sales and increased costs of public relation campaigns

3 Mandatory labour legislations

Increased operating costs

4 Civil wars Destruction of property, loss of sales, disrupted production run

5 Inflation Increased operating costs

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Types of Political Risk

Micro Risks: (It affects specific foreign business.)

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RISKS IMPACT

1 Kidnappings, Terrorist, Threats etc.

Disrupted production, highersecurity costs, reduced productivity

2 Increased Taxation Reduced after tax profits

3 Officials’ dishonesty Loss of business, Increasedoperating costs

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• Risk assessment by international businesses usually takes two form:

1. One is through the use of experts or consultants familiar with the host country or region under considerations.

2. Second is through the development of their internal staff and in-house capabilities.

Whatever the method, timely information from the people in the front line should not be missed.

Political Risk Assessment

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Eurasia Group, a political and economic risk analysis firm, has composed Global Political

Risk Index (GPRI).

The index is a composite measure of the state of a country’s government, security and economy. All indicators are scored on a scale of 0 to 100. The higher the number , the greater the political stability.


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Ranking of countries on GPRI by Eurasia

Countries 2011 2012Hungry 78 77S. Korea 76 75Poland 74 72Bulgaria 70 69Mexico 67 67China 66 61Brazil 66 64Argentina 66 66S. Africa 64 65Russia 63 61

India 62 62------- -- --Iran 51 49Venezuela 50 52Nigeria 48 47Pakistan 45 50

Assesses political risk associated with doing business in foreign countries, firms should evolve suitable strategies to manage such risks.

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• International businesses employ FIVE different methods / strategies for managing political risks.

1. Avoiding Investment

2. Adaptation1. Local Equity and Debt

2. Developmental Assistance

3. Insurance

3. Threat

4. Lobbying

5. Terrorism Consultants

Strategies for Managing Political Risks

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1. Avoiding Investment

• The simplest way to manage political risks is to avoid investing in a country ranked high on such risks.

• Where investments has already been made, plants may be wound up or transferred to some other country which is considered to be relatively safe.

• This may be a poor choice as the opportunity to do business in a country will be lost.


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• MNCs incorporate risk by means of the following three strategies:

1. Local Equity and Debt • This involves financing subsidiaries with the help of

local firms, trade unions, financial institutions and government.

• As partners in local businesses, these groups ensure that political developments do not disturb operations.

• Localization entails modifying operations, product mix to suit local tastes and culture.

• When McDonald’s commenced franchisee operations in India, ensured sandwiches did not contain any beef.


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2. Adaptation

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2. Developmental Assistance• Offering development assistance allows an

international business to assist the host country in improving its quality of life. Since the firm and the nation become partners, both stand to gain.

• In Myanmar, the US oil company Unocal and France’s Total have invested billions of dollars to develop natural gas fields and also spent $6 million on local education, medical care, and other improvements.


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2. Adaptation

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3. Insurance• This is the last means of adaptation. Companies buy

insurance against the potential effects of political risk.• Some policies protect companies when host

governments restrict the convertibility of their currency into parent country currency. Others insure losses created by violent events, including war and terrorism.

• Most developed countries have created agencies to insure the firms against risks.


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2. Adaptation

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3. Insurance• Most developed countries have created agencies to

insure the firms against risks.


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2. Adaptation

“ The Overseas Private Investment Corporation (OPIC), insure US overseas investment against nationalization, revolutions and foreign exchange inconvertibility. Similarly, Multilateral Investment Guarantee Agency (MIGA), a subsidiary of World Bank, provides insurance against political risks. Private insurance firms, such as Lloyd’s of London, also underwrites political risk insurance”.

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Strategies for Managing Political Risks Overseas Private Investment Corporation (OPIC)

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Strategies for Managing Political RisksMultilateral Investment Guarantee Agency (MIGA)

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3. Threat• Political risk can also be managed by trying to prove

to the host country that it cannot do without the activities of the firm.

• This may be done by trying to control raw materials, technology and distribution channels in the host country.

• The firm may threaten the host country that the supply of materials, products, or technology would be stopped if its functioning is disrupted.


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4. Lobbying• Influencing local politics through lobbying is another

way of managing political risks.• Lobbying is the policy of hiring people to represent a

firm’s business interests as also its views on local political matters.

• Lobbyists meet with local public officials and try to influence their position on issues relative to firm. Their ultimate goal is getting favourable legislation passed and unfavourable ones rejected.

• Lobbyists render variety of services for fees.


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Lobbyist Universe1. Owner-Promoters

– From Ratan Tata to Mukesh Ambani to N.R.Narayana Murthy to Azim Premji to Sunil Mittal, everyone has lobbed for better policies in telecom, oil & gas, education & retail

– They meet key policy makers personally

– Effectiveness is very high, since they bring a lot of personal credibility and heft of their business empires to weigh on the issues they champion

2. Consultants – Typically, retired bureaucrats themselves such as Pradip Baijal former TRAI

Chairman & C.M.Vasudev for Secretary in Ministry of Finance.

3. PR Firms – Perfect Relations, Genesis & IPAN are some such firms.

4. Professional Employees – Reliance Shankar Adawal, ITC’s Vidyanathan are some senior executives who have

extensive domain knowledge and champion in specific issues.

5. Politicos – Usually member of parliament, Salman Khurshid, S.Gurumurthy

6. Agents – these are largely fixers and do not have domain knowledge


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5. Terrorism Consultants

• To manage terrorism risk, MNCs hire consultants in counterterrorism to train employees to cope with the threat of terrorism.


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There are Four Basic Legal Systems prevailing around world:

System of Law

Legal Systems

Islamic Law

Civil or CodedLaw

Common Law

Marxist/SocialistLaw

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• Legal disputes can arise in three situations:1. Between governments

2. Between a firm and a government

3. Between two firms

• Disputes between governments are resolved through the intervention of the World Court at the Hague and the International Court of Justice, the principal judicial organ of the United Nations.

• Disputes of the other two situations must be handled in the courts of the country of one of the parties involved or through arbitration.

International Dispute Resolution

Which country’s court should handle a dispute is a relevant question.

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Principal means (methods) of resolving international disputes are:


Conciliation

Litigation

Arbitration

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• If the mutual talks do not bring any agreeable solution to both the parties then they resort to conciliation which means authorizing a common mediator to interfere in the matter so that both the parties can be in win-win situation.

• Mediator hears carefully to both the parties and recommends the possible way out.

• This is the least expensive and quick way to come to the mutual understanding if compared to arbitration and litigation.

• As the discussions happen only between the parties (though through mediator) matter remains confidential. Conciliation way is widely used by Chinese firms incase of disputes as they believe it’s non-threatening.


Conciliation

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Arbitration

• The second way towards dispute resolution, incase the first one (conciliation) fails, is arbitration.

• Under this, disputes are the taken to the formally designated authorities. These authorities constitute of experienced arbitrators and their decisions legally bound both the parties to stand by it.

• Examples of such authorities are – • The Inter-American Commercial Arbitration Commission, and• The International Chamber of Commerce.

• Arbitrator’s role can be played by anyone including lawyers, engineers or doctors depending on industries.

• For example architect or construction engineers can an Arbitrator in case of an international dispute between two construction companies.

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• Litigation is the third and last way out to the solution of a conflict. • If any one or both the parties don’t agree to the arbitrators decisions, they

move to the court of jurisdiction. • This is the most expensive and lengthy process of finding a solution. • Most of the companies try to avoid Litigation because of many factors like-

• Fear of creating a poor image in public• Fear of unfair treatment in a foreign court• Loss of confidentiality etc.


Litigation

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Areas of Concern for MNCs

MNC

Environmental Laws

Protection of IPRS

Product liability & safety

Competition laws

Bribery and Corruption

Advertising andSales promotion

Contracts

Shipping of goods

Labor Laws

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Gbm unit-05 (global political-legal environment)

Documents

global economic environment

political arrangement

legal system

alien environment

global trade theory

stable business environments

pressure clique political

rulers political ideology