BBK3363 |
International Business Environment
by Dr Khairul Anuar
L2: The Political and Legal Environments Facing Business
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Topics under International Business
Environment
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The International Business Environment
The Competitive Environment
The International Economic Environment
The Technological Environment
The International Cultural, Demographic and Social
Environment
The Ecological Environment
The International Political Environment
The Legal Environment
Globalisation, challenges and changes
Textbooks
• The International Business Environment
by Leslie Hamilton and Phlip Webster
• The International Business Environment: Challenges and
Changes,
by Ian Brooks, Jamie Weatherston and Graham Wilkinson
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Chapter Objectives
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To discuss the philosophies and practices of a political
system
To profile trends in contemporary political systems
To explain the idea of political risk and describe
approaches to managing it
To discuss philosophies and practices of the legal
system
To describe trends in contemporary legal systems
To explain legal issues facing international companies
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Political and Legal Factors Influencing
International Business Operations
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The International Political
Environment
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Political decisions affect all aspects of the
business environment
Political decisions reflect underlying ideologies
or beliefs
Political decisions can create opportunities or
threats for organisations
Political decisions are taken at a variety of levels
Geo-Political Scales
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Political decisions are taken at different levels
Local e.g. Cyberjaya
State/Regional e.g. Selangor
National e.g. Malaysia
Regional e.g. ASEAN
Global e.g. World Trade Organisation
A Global Scale
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The United Nations
The Bretton Woods institutions
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The World Bank
The International Monetary Fund
The World Trade Organisation
The G20
A Regional Scale
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Regional Co-operation agreements
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ASEAN
CARICOM
EAC
EU
Mercosur
NAFTA
SADC
A National Scale
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The nation state (for example the UK, Japan,
Brazil, the USA, Tanzania, Australia) , based on:
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Sovereignty
Territoriality
Authority
Legitimacy
A Local Scale
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The level below the nation state – but many
variations in size, scale and scope. Examples
include:
California (a state of the USA)
Marin County (within California)
Leeds City Council (in the UK)
St Brelade (a parish on the island of Jersey)
Systems of Government
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Different ways of classifying may be found
Democratic/ Authoritarian/ Theocratic/ Military
Communist/ Capitalist
Centralised/ Federal
One-party/ Multiparty
Functions of Government
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Legislative
Administrative
Judicial
The Role of Government
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Much debated!
And much changing over time
Interventionist (eg UK 1945-1979)
Liberal/ Free-market (eg UK 1979-2008)
Back to intervention (eg UK 2009)
And, perhaps, back to liberalism (UK 2010)
Risk and Stability
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Companies like certainty in their environment
Companies tend to invest where risk is limited
Risk comes from many sources, including:
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Political instability
Corruption
Terrorism
Climate change
Definition of a Political System
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The complete set of institutions, political
organizations, and interest groups,
The relationships among institutions, and the
political norms and rules that govern their
functions
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Political environments
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Political environments may range from a
democratic system to communism with other
variations between these ideological extremes.
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In international construction, like in international
business, one has to deal with governments as
they are presently structured with all their
diversity, and even regressiveness.
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Individualism vs. Collectivism
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Individualism: primacy of the rights and role
of the individual
Collectivism: primacy of the rights and role of
the community
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Political Ideology
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The system of ideas that expresses the
goals, theories, and aims of a sociopolitical
program
Most modern societies are pluralistic—
different groups champion competing political
ideologies
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The Political Spectrum
Reactionary (or reactionist) is a political epithet typically applied to
extreme ideological conservatism, especially that which wishes to return
to a real or imagined old order of things, and which is willing to use
coercive means to do so.
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The Political Spectrum
Reactionary (or reactionist) is a political epithet typically applied to
extreme ideological conservatism, especially that which wishes to return
to a real or imagined old order of things, and which is willing to use
coercive means to do so.
Consevative - Right-wing, anti-federalist . Prefer smaller government,
less regulation, most services to be provided by the private sector in a
free market, and a literal interpretation of the Constitution.
Liberal - Left wing, federalist. Prefer more regulation and services like
free universal health care to be provided by the government to all
citizens.
Political radicalism denotes political principles focused on altering social
structures through revolutionary means and changing value systems in
fundamental ways
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Democracy
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Wide participation by citizens in the decisionmaking process
Five types:
 Parliamentary
 Liberal
 Multiparty
 Representative
 Social
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Fundamental Elements of
Democratic Political Systems
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Totalitarianism
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Totalitarianism is the other side of the political
spectrum.
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Major features include:
• An individual, a single party, or a select group of
individuals monopolizes political power
• Non-recognition of any opposition
• Decision making is restricted to an individual or
a select group of individuals
• All societal resources are monopolized by the
state
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Totalitarianism
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Restricts decision making to a few individuals
Types:
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Authoritarianism
Fascism
Secular totalitarianism - Secularism is based on
the principle that affairs of this world should be
the most important concerns for ethics and
human life. Secular totalitarianism, therefore, is
based on worldly rather than religious concepts.
Theocratic totalitarianism - : Political control is
vested on religious leaders.
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Trends in Political Systems
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Third Wave of Democracy
Engines of Democracy
1. The failure of totalitarian regimes to
deliver economic progress
2. Improved communications technology
3. Economic dividends of increasing
political freedom
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Political Risk
In the broad context of international business,
political risk is defined as the risk or probability of
occurrence of some political events that will
change the prospects for the profitability of a
given investment.
Macro-political risk events include sociopolitical
disorder, power group transfer, and political
corruption as well as government interference.
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Definition of Political Risk
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The risk that political decisions or events in a
country negatively affect the profitability or
sustainability of an investment
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Types:
 Systemic
 Procedural
 Distributive
 Catastrophic
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Measuring Political Risk
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Instability: The probability of encountering political risk in a host
country is considered to be directly related to the relative stability the
country's political system. This instability may have its roots in
different economic, political, and social factors. Some specific causal
factors may include communal unrest, strained international relations
with neighboring countries
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Past patterns: Past patterns of political behavior is analyzed to
determine political risk involved. However, predicting political risk on
the basis of historical records has its own drawbacks. Political
situations under which risks were encountered by companies or
individuals in the past might have changed altogether; (e.g. Vietnam).
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Opinion analysis: Political risk may also be measured qualitatively by
examining the views of people engaged in governmental decision
making and people who may influence future political events affecting
business.
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Political Risk Management
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Avoidance: Selecting only safe environments for business and
rejecting regions that are perceived to have greater than average
degree of political risk.
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Premium for risk: Increasing the ROI (return on investment) or
requiring shorter period of payback.
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Adaptation: Responding to the particular political environment of the
host country and structuring the international operations accordingly
(e.g. adapting to the local methods, utilization of host country
professional expertise, joint venture, etc.).
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Transfer: Sharing of risks with other individuals or companies or
reducing the risks through transfer to other agencies.
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Political Strategies for conducting
International Business
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Some of the steps that an individual or a company may follow in
order to establish political strategies:
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Identifying the issue (e.g. protectionism, environmental standards,
human rights, workers rights, etc.)
Defining the nature of the political issue
Assessing the potential political action of other firms and of special
interest groups
Identifying important institutions and key individuals
Formulation of strategies (objectives, alternatives)
Determining the impact of implementation (both in home and host
countries)
Selection of the most appropriate strategy and implementation.
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Conclusion
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The political environment is both complex and dynamic
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Individuals and organisations have different views as to
the ‘correct’ role of governments and institutions – and
interpret these relationships in different ways
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Government and institutional attitudes change over time,
sometimes amazingly quickly
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Decisions at the four different geo-political levels are all
interlinked
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International aspects are increasingly important