Chapter 4
Politics and Law
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Learning Objectives
To understand the importance of the political
and legal environments in both the home and
host countries to the international business
executive.
To learn how governments affect business
through legislation and regulations.
To see how the political actions of countries expose
firms to international risks.
To examine the differing laws regulating international
trade found in different countries.
To understand how international political relations,
agreements, and treaties can affect international
business.
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A Look at Three Segments
The Home-Country
Perspective
Host Country Political
and Legal Environment
International Relations
and Laws
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The Home Country Perspective
Major areas of governmental
activity that are of concern to the
international business manager:
Embargoes and Sanctions
Export Controls
Regulation of International
Business Behavior
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Sanctions and Embargoes
Governmental actions that distort
free flows of trade in goods,
services, or ideas for adversarial
and political, rather than economic,
purposes.
Sanctions tend to consist of specific
coercive trade measures.
Embargoes are typically broader in
that they prohibit trade entirely.
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Export Controls
Are designed to deny or delay the acquisition
of strategically important goods by
adversaries.
The legal basis for export controls varies in
nations.
Most international business can be carried out
under NLR conditions.
Export licenses are issued by the Dept. of
Commerce for commodities whose export is
considered sensitive.
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How an Export License is Issued
Specialists in the Department of Commerce
match the exported commodity with the
Critical Commodities list, the country of
destination, and the recipient company.
If no concerns exist in any one of the three
areas, a license is issued.
This process is only carried out if the product
or the recipient country is considered
sensitive.
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A New Environment for Export Controls
Focus of export
controls on the Third
World
A loosening of mutual
bonds among allied
nations
The increased foreign
availability of hightech products
The speed of change
and the rapid
dissemination of
information and
innovation around the
world
The issue of
equipment size
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Implementation and Enforcement of
Export Controls
Export controls are increasingly difficult to
implement and enforce.
The number of countries that are able to
manufacture products of strategic importance
has increased.
Products that are in need of control are
developed and disseminated very quickly.
It is difficult to control the transfer of
technology and know-how.
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Regulation of International
Business Behavior
Regulations on firms varies
substantially among nations.
Nations may employ boycotts to
govern business activities.
Antitrust Laws are a regulatory
activity.
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Bribery
Firms operating abroad are
affected by laws against bribery
and corruption.
International businesses may
bribe to counterbalance poor
product quality, to create a
market for goods, or to stay
competitive with other firms that
bribe.
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Host Country
Political Action and Risk
Varies widely from country to country
Economic Risk
Less dangerous, but more common
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Three Types of Political Risk
Ownership Risk
Exposes property and life
Operating Risk
Interference with the ongoing operations
of a firm
Transfer Risk
Limitations on the outflow of funds
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Political Risk May Involve
Confiscation
The government takeover of a firm without
compensation to the owners.
Expropriation
A form of government takeover in which
the firm’s owners are compensated.
Domestication
The government demands transfer of
ownership and management responsibility.
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Economic Risk
Exchange controls may be levied
Tax policies may be used to control
corporations and their capital
Price controls may employed to
control prices of imported products
or services
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Managing the Risk
Demonstration of
concern with host
country’s society can be
effective.
Firms can take out
insurance to cover losses
due to political and
economic risk.
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Legal Differences and Restraints
Countries differ in their laws as as
well as in their use of the law. There
are two major legal systems
worldwide:
Common Law: Based on tradition and
dependent upon precedent and custom.
Code Law: Based on a comprehensive set of
written statutes.
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International Relations and Laws
International Politics:The effect of politics on
international business is determined by both the
bilateral political relations between home and host
countries and by multilateral agreements
governing the relations among groups of
countries.
International Law:Plays an important role in the
conduct of international business. Treaties and
agreements have a strong influence on
international business operations.
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International Law
The World Trade Organization defines
internationally acceptable economic
practices for its member nations.
The Patent Cooperation Treaty (PCT)
provides procedures for filing patent
applications.
The United Nations has developed codes
and guidelines that affect international
business.
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In cases of disagreement, the
parties can choose:
Arbitration: Procedures are quicker and
often spelled out in the original contract
Litigation: Often involves extensive
delays and is very costly
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