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Political and Legal Environment

Nov 28, 2014



Political Legal Economic Cultural Technological

Political EnvironmentRefers to:System of Government Type of Structure of Government operating in that country. This includes the Political System like in UK we have the Parliamentary and in US we have Presidential Form of Government. Democracy Totalitarianism- Countries under this type of Regime enjoy rapid growth e.g. Hong Kong , Singapore, South Korea and Taiwan. 60% of countries operate under democracy and the rest are totalitarian.

Totalitarianism Individual freedom is completely subordinated to the power of authority of state concentrated in the hands of one person or a small group.

(e.g Nazi Germany under Hitler and former Soviet Union under Joseph Stalin are some examples)

Political Ideologies: a) Pluralistic: Different ideologies exist within the same society as there is no official ideology accepted by Yugoslavia(many different languages and alphabets), S.Africa (ethnic background) and Northern Ireland (religion). One form of democracy is the parliamentary government found in the UK where it is divided into geographical districts and a representative is elected to represent each district in House of Commons . General elections are held every 5 years. After a general election the leader of the majority party (House of Commons) is asked to form the government. Totalitarianism - In a totalitarian state , a single party, individual ,or group of individuals monopolizes political power and neither recognizes nor permits opposition. Theocratic Totalitarianism Here religious leaders are also political leaders.(e.g middle eastern countries)

Secular Totalitarianism: Here the government imposes order through militia and is based on worldly rather military concepts.(e.g Cambodia and Iraq). Communism : It is a form of secular totalitarianism .Under communism the political and economic systems are virtually inseparable. Karl Marx opined that economic forces determine the course taken by a society.

Legal SystemUS and UK follow the common law system based on tradition, precedent, and custom and usage and the court fulfills an important role in interpreting the law according to characteristics.

The civil law system, also called a codified legal system is based on a very detailed set of laws that are organized into a code which is the foundation for doing business (e.g Germany, France and Japan)

Cultural Environment facing Business Polycentrism Control is decentralized so that a manager in Rio conducts the business of the company in what he feels is the Brazilian way. Ethnocentrism It is the belief that ones group is superior to others. The term is used in International business to describe a company or individual so imbued with the belief that what worked at home should work abroad that environmental differences are ignored. Geocentrism - Refers to operations based on informed knowledge of both home and host country needs, capabilities , and constraints.

Types of Totalitarianism: Theocratic- In this type of system(theocracy) the religious leaders are also the political leaders. Religious leaders frame and enforce laws that are based on religious belief e.g Afghanistan/Middle East and Iran are some of the examples. Secular- Political System is guided by military and bureaucratic power. In such a system the military controls the government and makes decisions which it deems fit for the country.

Tribal- This exists mostly in African countries like

Zimbabwe, Tanzania,Uganda and Kenya. It occurs when a political party that represents the interests of a particular tribe monopolises power.

Right Wing Totalitarianism- Private ownership is

endorsed by government ,market forces are also allowed free play, but political freedoms are rarely granted e.g. Argentina, Brazil and Chile are some of the examples. China is a classic example of Polity which though communist by definition is pursuing right wing policies.

Political Risk - Corporates face political risk when they conduct business with the outside world. Types of Risks: Macro Political Risk- Affects all international businesses in the same way. Expropriation, seizure of privately owned assets, as for example, a farm or a factory, by government with little or no compensation to the owners is a macro political risk. Micro Political Risk-Affects specific foreign business. These include industry regulations, taxes, kidnapping and terrorist threats. India s decision to reduce foreign equity to 40% in 1975 and Peru s decisions to nationalize its copper mines are examples of micro political risks.

International Businesses must conduct some form of political risk assessment in order to manage risks. Typically managers in host countries assess the potentially destabilizing issues and evaluate their future impact on the firm and making suggestions for handling problems.

Eurasia Group, a political and economic risk analysis firm, has composed Global Political Risk Index (GPRI). The index is a measure of the state of a country s government, security, society and economy. All indicators are scored on a scale of 0 to 100.

Avoiding Investments- Avoid investing in a country ranked high on

such risks. This is a poor choice as far as opportunity cost is concerned.Adaptation-Incorporating risk in business strategies by means of

following three strategies:Local Equity and Debt: 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, or any such activity to suit local tastes and culture e.g. when McDonalds commenced operations in India it ensured that its sandwiches did not contain any beef.

Developmental Assistance To allow the International Business to

assist the host country in improving its quality of life. In Myanmar, the US oil company Unocal and France s Total have invested billions and dollars to develop natural gas fields and also spent $6 on million on local education, medical care and other improvements.


Considered as the last means of adaptation. Companies buy insurance against the potential effects of political risk. The Overseas Private Investment Corporation (OPIC) insures US overseas investments against nationalization, revolutions and foreign exchange inconvertibility. Similarly the Multilateral Investment Guarantee Agency (MIGA) a subsidiary of World Bank provides cover against political risks.

Threat- Manipulating things and trying to prove to the host country

that it cannot do without the activities of the firm. This is done through controlling raw materials, technology or distribution channels in the host country.

Lobbying- 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 relevant to the firm.Lobbyists charge fees for their services and provide services for M& A deals or getting clearances to start a new project.Terrorism Consultants- These consultants train employees of MNCs

to counter terrorism threats.

Relative Bargaining Power: An MNC has the power to do business in

host country based on its own terms and conditions. Initiating investment in a host country, possessing proprietary technology and owning critical raw materials will enable a firm to enjoy high bargaining power. Integrative as well as Protective and Defensive Techniques: Integrative techniques are designed to help the subsidiary to become one with the host country s need and culture. Protective and Defensive techniques are designed to discourage the host government from interfering in operations. Examples are doing as little manufacturing as possible and conducting all R&D outside the host country, limiting responsibility of local personnel and hiring only those who are vital to the operation and raising capital from local banks and host government as well as from outside sources.