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International Business. Chapter Three The Political and Legal Environments Facing Business. Political System Defined.

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International business l.jpg

International Business

Chapter Three

The Political and Legal Environments Facing Business


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Political System Defined

Political system:the complete set of institutions, political organizations, and interest groups, the relationships amongst those institutions, and the political norms and rules that govern their functions. It can be based on individualism or collectivism.

Political ideology:the ideas that expresses the goals, theories, and aims of a political party/forum or a sociopolitical program


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Democracy vs. Totalitarianism

Democracy: widespread citizen participation in the decision-making and governance processes, either directly or through elected representatives

Totalitarianism: the monopolization of power by a single agent; opposition is neither recognized nor tolerated

Democratic governments/institutions are on the rise after the fall of Berlin Wall in 1989


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Fundamental Features of Democratic Political Systems

  • Freedom of opinion, expression, press, religion, association, and access to information

  • Citizen power and access to the decision-making process

  • Citizen equality before law

  • Free, fair and regular elections

  • Majority rule with minority protection

  • Independent and fair court system

  • Fair legal system: Rule of Law prevails



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Political Risk

Political risk:the expectation, i.e., the likelihood, that the political climate in a country will change in such a way that a firm’s operating position or investment value will deteriorate. Four types of political risks are:

  • Systemic: a change in public policy that affect everyone

  • Procedural: bureaucratic delays, labor disputes, etc.

  • Distributive: tax and regulatory risk in respective industries

  • Catastrophic: random political events


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Managing Political Risks

  • Be a good corporate citizen (example: participate in development projects, literacy etc.)

  • Expand power bases through business relationships (example: joint venture, licensing, political payoffs etc.)

  • Study government attitude and participate government incentive programs

  • Maintain good relationship with political allies, other embassies in the country


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Legal System

Legal system: the mechanism for creating, interpreting, and enforcing the laws in a specified jurisdiction

Types of legal systems:

  • Common law [based on precedent, traditions]

  • Civil law [based upon a set of laws that comprise a code]

  • Theocratic law [based upon religious precepts]

    Mixed systems are also possible.


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Legal Issues in International Business

  • Operational concerns

    • Starting and closing a business

    • Contract enforcement

    • Hiring and firing employees

  • Strategic concerns

    • Marketplace behavior

    • Country of origin issue

    • Product safety and liability

    • Legal jurisdiction

    • Arbitration

      World Bank’s Ease of Doing Business


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Chapter 3: Discussion Questions

  • Define political system and explain why a business manager should study the political system of a country.

  • How does democracy differ from totalitarianism? Will the conduct of business be different in the two systems?

  • What is political risk? How can we manage political risk?

  • Define the three types legal systems and their implications in international business.