The Political Environment
Trevor Hunter
King’s University College
What is the political environment
The political environment comprises
institutions that:
• influence the political environment through
their policies
• pass laws and establish regulations
• implement and enforce laws and regulations
2
Levels of Decision Making
Decisions affecting the political environment
are made at the:
•
•
•
•
international level – EU, UN
national level – federal governments
regional level – provincial or state
local level - municipal
3
National Decision-Making
Unitary systems:
• decision-making power is centralized in hands
of central government - the regions have little
or no autonomy
Federal systems:
• power is shared between the centre and the
regions
4
Political and Legal Institutions
Countries usually have institutions, backed up by
coercion that make decisions that implement
rules to enforce or support the society’s norms
and values:
• Legislative branch: comes up with laws
• Executive branch: implements laws and
advises on policy
• Judicial branch: interprets and applies laws
5
Different Political Systems
• Liberal democracy (less than half of 191 UN
members)
• Authoritarian or absolutist (Burma; Saudi
Arabia)
• Communist (China; Cuba; Vietnam; N.
Korea)
• Theocratic (Iran; Vatican)
6
Liberal democracy
Characteristics:
• Right of citizens to elect governments to
represent their interests
• Governmental institutions based on majority
rule
• Members drawn from a variety of political
parties
• Free elections
7
Liberal democracy
• a permanent, skilled and impartial public/civil
service responsible to government applies and
enforces laws
• the right to personal freedom and to express
views freely
• state institutions which are constrained in
their powers by other institutions e.g. an
independent judiciary
8
Liberal democracy
Checks, balance and conflict:
•In liberal democracies conflict can occur
between different branches of the state:
–Politicians and judiciary
–Politicians and bureaucrats
•Conflicts are resolved via rule of law, the court
system or compromise – not violence or illegal
activities
9
Authoritarian and Absolutist Systems
• Characteristics:
– Restrictions on operations of political
parties
– Power in hands of one or a few people
– No checks or balances on those holding
power
– Power retained through patronage
10
Authoritarian and Absolutist Systems
• Characteristics:
– Citizens unable to elect governments – if
there are elections they are rigged
– Governmental institutions based on whim
and maintaining power for those who rule
– Members drawn from rulers’ political party
– Limited (if any) rights to citizens
– No free speech
11
Theocratic Systems
• Characteristics:
– Religion/faith plays the dominant role
– Religious leaders and political rulers are the same
people
– Political decisions derived from principles of the
dominant religion
– Tend to be sexist and misogynistic
– Low tolerance for non-believers
– Limited (if any) citizens’ rights
– No tolerance for dissent
12
Communism
• Characteristics:
– Means of production owned by the State
– Domination by one political party
– The party controls the legislative, executive
and judicial branches of the State as well as
trade unions and the media
– Limited citizens’ rights
– No private ownership
– Distribution of wealth
– Not “true” Marxist communism
13
Functions of the State
The State performs some very important functions
with major implications for business:
• Establishes the legal framework
• Regulator and deregulator
• Public expenditure and taxation
• International negotiator
• Internal and external security
• Arbitrator/judge
• Currency and taxation
14
State as Arbitrator
Apple versus Samsung
Companies sometimes look to the judicial
system to act as arbitrator in business
disputes.
In 2011
• Apple sued Samsung for infringing its
patents in courts in the US, S.Korea, Japan,
Germany and Australia
• Samsung responded by suing Apple in
Germany, France, Japan and S. Korea for
patent infringement
15
Functions of the State
The State also plays a role in the business
environment of a given country as a:
• Subsidiser
• Competitor
• Customer and supplier
16
How Business Influences the Political
Environment
• The relative comparative advantage of a
country can be influenced by firms - done to
make their situation better than that of
competitors:
– Pressure group – lobbying
– Promises or threats
– State consultation with business
– Representation on government bodies
– Giving money or gifts
– Employment and exchange of personnel
17
The Socio-cultural and Legal
Environment
Trevor Hunter
King’s University College
The Socio-cultural Framework
• Businesses operating internationally face
environments where social characteristics,
structures, and institutions may differ
greatly
• To be successful, businesses need to be
aware of the differences that can affect the
country’s relative comparative advantage
19
Culture
Culture is a system of shared:
• Beliefs
• Values
• Customs
• Behaviours prevalent in a society that are
transmitted from generation to generation
• “The collective programming of the mind which
distinguishes the members of one category of people
from another” Hofstede
20
Culture
•
•
•
•
•
•
•
•
Values – including moral/religious beliefs
Norms – rules of behaviour
Sanctions – to enforce the norms
Language
Diet
Dress
Institutions – transmit the norms and values
Dynamic – changes over time and due to
outside or inside influences
21
Hofstede
Lessons for MNCs trying to harness national
comparative advantage:
• Cultural norms and values very powerful in the workplace
• Organizational culture less influential than national cultures
• Successful management in one culture no guarantee of
success in another
• Business may need to adopt a different managerial approach
in different national contexts
• Countries may not have a single national culture
22
Five Dimensions of Culture
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•
•
•
•
Acceptance of power inequality
Avoidance of uncertainty
Individualism versus collectivism
Materialism versus quality of life
Long-term versus short-term orientation
23
Five Dimensions of Culture
Individualism versus collectivism:
• Degree to which people act as individuals
vs. acting as a group
• Which is more important - rights of the
individual vs. those of the group?
• USA, France vs. Asian, African nations
24
Five Dimensions of Culture
Avoidance of uncertainty:
• Extent to which people prefer structured
to unstructured situations
• Uncertainty tolerance = few rules, little
attempt to control outcomes
• Africa, Germany  low tolerance, China,
UK  high tolerance
25
Five Dimensions of Culture
Materialism versus quality of life
(masculinity/femininity):
• Extent to which certain material/competitive
activities/behaviours are valued vs. those
more related to quality of life and
relationships
• USA, Japan  high, Nordic, African 
low
26
Five Dimensions of Culture
Power distance:
• Degree of inequality accepted in society
• High  hierarchy and social class
• Low  equality and egalitarianism
• Arabic, Latin American  high
• USA, Nordic  low
27
Five Dimensions of Culture
Long-term versus short-term orientation:
• Extent to which cultures make decisions
based on long-term thinking
• Brazil, China  long-term
• USA, UK  short-term
28
Five Dimensions of Culture
Implications for business:
• Cultural differences must be taken into
account when entering new markets
• ME: Does what we sell “fit” cultural
norms?
• Eff: Is what we need to do in this country
culturally acceptable?
29
Five Dimensions of Culture
Implications for business:
• Similarities make it easier to enter for
both purposes
• Differences can make it very difficult to
succeed and reduce, if not even
eliminate any comparative advantage
30
Influences on Culture
Culture is not static and can be influenced a
number of ways:
• Globalization – contact and exchanges with
other cultures
• Changes in political, economic, social and
technological forces within society
• MNCs can affect these
31
Social Environment
Social characteristics vary from country to
country:
•The nature and extent of divisions in societies:
–income and wealth
–social class
–Tribe
–ethnic group
–gender
32
Social Environment
Social characteristics vary from country to
country:
•Different models of welfare provision
•Demography – population size, growth and
structure
•Education – levels of literacy and educational
achievement
•Health – infant & maternal mortality, life
expectancy, incidence of diseases
33
Social Models
•In different countries the state takes on
different levels of responsibility for the
welfare of its citizens (i.e. healthcare,
education etc.) – some are more
involved than others
•Welfare policies differ in terms of their
aims, amount spent, priorities, target
groups etc.
34
Social Models
There are four predominant social
models:
1. The Liberal Social Model
2. The Corporatist Model
3. The Social Democratic Model
4. The East Asia Model
35
The Liberal Social Model
• Based upon a clear distinction between the
deserving and undeserving poor
• Limits to the type and levels of benefits
• Commitment to low taxes and full
employment
• Relatively low level of welfare provision
• Belief that people can better themselves
through their own efforts
• Canada, USA, Australia
36
The Corporatist Model
• High levels of social expenditure
• Generous welfare benefits based on individual
contributions
• Poverty is inevitable or due to social injustice
• Emphasizes the importance of work
• Values dialogue amongst the social partners
• Gives important role to voluntary
organizations in welfare provision
• Western Europe
37
The Social Democratic Model
• Relatively high levels of social
expenditure
• Generous and universal welfare benefits
• Redistributive tax and spending policies
• Help for those wishing to work
• Dialogue between the social partners
• Scandinavian countries
38
East Asia Model
•
•
•
•
•
Priority given to economic growth
Low levels of most social expenditure
Strong emphasis on education
Relatively low welfare benefits
Belief that family has a greater
responsibility in welfare assurance
39
The Ten most Populous Countries 2014 (est.)
1
2
3
4
5
6
7
8
9
10
China
India
United States
Indonesia
Brazil
Pakistan
Nigeria
Bangladesh
Russia
Japan
1,355,692,576
1,236,344,631
318,892,103
253,609,643
202,656,788
196,174,380
177,155,754
166,280,712
142,470,272
127,103,388
Source: https://www.cia.gov/library/publications/the-world-factbook/rankorder/2119rank.html
40
Importance of the Legal Environment
The legal environment can influence:
• Choice of production techniques
• Product characteristics
• Packaging and labelling
• Advertising and sales promotion
41
Importance of the Legal Environment
The legal environment can influence:
• Terms and conditions of trade
• The way competition is conducted
• Ownership of assets
• Financial reporting
• The treatment of employees
All of which can influence relative
comparative advantage (depending upon why
you want to enter the country)
42
Different Legal Systems
Four major systems in the world
Civil Law:
• Most widespread
• Primary source – legislation/legal codes
• Judges apply and interpret laws
• Good for businesses because codified laws
are much easier to interpret and follow
43
Different Legal Systems
Four major systems in the world
Common Law:
• Operates in e.g. UK, US, Canada, Australia, India
• Source of rules from interpretations of principles
and judgements in prior cases – precedents –
allows for changes that respond to societal
changes
• Statutes take precedence over common law
• Precedents state what can be done, but difficult
to find – hence the cost of legal fees and number
of lawyers
44
Different Legal Systems
Customary Law:
• Source – life experiences, religious or
philosophical principles
• Not written
• Often mixed with another form
• Judgement made by elders or chiefs
Muslim Law:
• Source – the Qur’an
• Sometimes limited to personal behaviour, others,
much more extensive
• Judgement made by clerics
45
Legal Systems across the World
46
Laws Affecting Business
Contract:
• Legally binding agreement between buyers
and sellers of goods and services
• Breaches of contract – complainant can get
redress through the courts
47
Resolving a Contract Dispute
No. of Days to Resolve the Dispute
60
47.9
50
40
33.2
32.2
30
20
24.8
11.1
14.4
16.5
14.4
10
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US
J
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Ge
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an
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Co
bia
om
UK
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B
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A
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Source: World Bank, Doing Business Database 2012
48
Ranking
Getting credit, protecting investors, enforcing contracts, resolving insolvency
Source: World Bank Doing Business 2012
49
Laws Affecting Business
Tort Law
• Involves injury to people or their assets
• The aggrieved can pursue the accused
through the courts
Criminal Law
• Comes into play when a crime is committed
e.g. selling dangerous products, fraudulent
accounting, bribery
• Prosecution is undertaken by the State
50
Laws Affecting Business
International Law:
• Law that applies across boundaries/in more
than one country
• Increasingly important for business in a
globalising world
• Takes the form of treaties, codes, conventions
• Facilitates international trade and investment by
reducing:
– costs of disputes
– uncertainty
– the number of disputes with suppliers and customers
51
International Arbitration
Arbitration involves the settlement of a
dispute by an impartial third party e.g. the
UN, the World Bank.
Increasingly popular with business because:
• The arbitrator is neutral
• Confidentiality of proceedings
• Flexible procedures
• Decisions enforceable in different countries
52
The Technological Environment
Trevor Hunter
King’s University College
Technology
Most global firms in the world engage in
R&D (research and development) in
multiple locations around the world and
spend millions of dollars on that
research and in the FDI that is used to
set up the facilities.
54
Technology
Largest R&D Expenditures – 2011*
Name
Country
Industry
Toyota
Japan
Automotive
$9.9 Billion
4.2
Novartis
Switzerland
Health
$9.6 Billion
16.4
Roche
Switzerland
Health
$9.4 Billion
19.5
Pfizer
USA
Health
$9.1 Billion
14.4
Microsoft
USA
Software
$9 Billion
12.8
Samsung
S. Korea
Electronics
$9 Billion
6
Merck
USA
Health
$8.5 Billion
16.5
Intel
USA
Electronics
$8.4 Billion
15.5
GM
USA
Automotive
$8.1 Billion
5.4
Nokia
Finland
Electronics
$7.8 Billion
14.5
*Source:
Amount
http://www.booz.com/global/home/what-we-think/global-innovation-1000/top-20-rd-spenders
% of Sales
55
Technology
R&D is important for firms to:
• Develop new/improved products to earn
higher revenues, profits and growth
• Learn new/improved processes for higher
productivity/ lower costs
• Freeze out rivals –
iPod,Microsoft,Sony/Toshiba
• Allow SMEs to compete with bigger rivals
56
Technology
In the global business environment, R&D is
important for firms because new firms
continually enter the market. Sometimes
these entrances are anticipated but often
not, and recently, more companies are
entering from developing countries and
disrupting industries (Huawei, Lonovo):
–Product obsolescence
–Shortening of the product life cycle
57
Technology
The technological environment of a given
country can provide it with a comparative
advantage as Global firms recognize that
innovation does not only come from
domestic sources therefore developing
countries often compete for R&D FDI
through:
–Subsidies
–Tax breaks
58
Technology
R&D facilities are attractive to countries
because:
•They create numerous high-paying jobs
•They create numerous related jobs
(construction, suppliers etc.)
•They create spin-off effects
–New start-ups
–Spread of technology
–Overall infrastructure improvements
59
Technology
Sources of a technological
environmental comparative advantage:
–Universities
–Research institutes
–Individual inventors
–Infrastructure
–Other firms:
•rivals
•distributors
•customers
•suppliers
60
E-Commerce
Rapidly growing area of business
issues:
• No single set of laws applicable to internet
• Law lacks clarity
• Difficulties applying and enforcing law on
individuals and businesses domestically and
especially abroad
• Need for international law
61
Technology Protection
IP protection is a big risk globally:
• Firms can protect their intellectual property
through:
– Patents – exclusive right to exploit an
idea commercially
– Copyright – literature, music TV, film
– Trade marks and designs
– Secrecy/preventing employees working
for a rival company
62