International Business
Fall 2013 – Lecture 4
Instructor : RAZA ILLAHE
Lahore Leads University
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Chap 2 ,remaining topic : Factors affecting introduction of
Cultural Change
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Chap 3, Political and Legal Environment Facing Business
When companies want to establish their presence
in foreign markets, mostly they have to establish some
sort of change. Introduction of change usually causes
resistance from employees. We can have a look at
the factors that affect change.
Factors Affecting Introduction of
Cultural Change
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Value systems
Cost/benefits of change
Resistance to too much change
Participation
Reward sharing
Opinion leadership
Timing
Learning abroad
Value systems :
More contradictory to our value, more hard it is to change
e.g Eriteria has religious taboos against seafood such as prawns, small
fishes etc. Believed to be bad in taste as well. Seafood is abundant.
Despite shortage of regular food, they avoided seafood. Officials from
Food programme targeted school children to promote seafood habits there.
In a matter of 10 or more years, seafood market started to grow.
Cost Benefit Analysis:
How much benefit a introducing something is
costing us? Is the return beneficial? For example ; introduction of rleigious
program and fortnightly sermon at a production plant is resulting in better
employee commitment and a sense of welfare.
Value systems :
More contradictory to our value, more hard it is
to change e.g Eriteria has religious taboos against seafood such as
prawns, small fishes etc. Believed to be bad in taste as well.
Seafood is abundant. Despite shortage of regular food, they
avoided seafood. Officials from Food programme targeted school
children to promote seafood habits there. In a matter of 10 or more
years, seafood market started to grow.
Cost Benefit Analysis of Change:
How much benefit a
introducing something is costing us? Is the return beneficial?
Resistance to too much change : Change should be a gradual process.
Implementation of sudden changes can cause disturbance and
annoyance for employees ; resulting in de-motivation.
Participation: Discuss proposed changes with stakeholders in advance.
This way company may understand how strong the resistance is. They
can help stakeholders learn why change is needed and ease fears of
change. Employees will be satisfied that thare are consulted and listened
to.
Reward Sharing: Employees may think that there is no benefit for them for
change. It will be helpful to give some reward /bonuses in order to make
them try the change or be part of the change.
Opinion Leadership: By making use of local people who can influence. For
example. Ford wanted to implement U.S production methods in mexico,
they brought some non-supervisor employees to U.S and showed them
the new system. These workers had more credibility than U.S or
Mexican supervisors.
Timing : Many well though changes , fail simply because they are introduced
at a bad time. A proposed labour saving method ,may make many
employees nervous about losing their jobs ,no matter how much
management tries to reassure them. If change is introduced at a time
when labour is in shortage, then firm may face less resistance and fear.
Chapter 3 –Political and Legal
Environment Facing Business
Chapter 3 –Political and Legal Environment
Objectives
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To discuss the goals and functions of a political system
To outline trends in the emergence contemporary political systems
To explain the idea of political risk and describe approaches to
managing it
To understand how political and legal systems affect the conduct of
business
To describe trends in the evolution and diffusion of contemporary
legal systems
To discuss the issue of the rule of law versus the rule of man
To explain legal issues facing international companies
To explain the idea of intellectual property and to discuss areas of
concern and controversy
Definition of a Political System
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The complete set of institutions,
political organizations, and interest
groups of a society
Political Ideology
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The system of ideas that expresses the
goals, theories, and aims of a sociopolitical
program
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Most modern societies are pluralistic—
different groups champion competing
political ideologies
Political Ideology
Democracy
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Wide participation by citizens in the
decision-making process
Political Ideology
Totalitarianism
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A single agent –whether an individual, group or party –
monopolizes political power and tries to mobilize people
towards two goals
Unquestioning support for the official state ideology
Opposition to activities that run against the goals of state
Trends in Political Systems
Engines of democracy:
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Failure of totalitarian systems to deliver
economic progress
Improved communication technology
Belief that democracy leads to improved
standards of living
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The march towards greater political freedoms and
better civil liberties strongly fuelled a sense of
inevitability.
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Collectively these trends stabilized operasting
conditions for companies worldwide,supported
common rules for int’l competition and paved the
way for increased globalisation.
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
Types:
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Systemic
Procedural
Distributive
Catastrophic
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Systemic Political Risk
Risk that affect all firms because of a change in public policy.
Or in other words Risk present for the entire market operating in a
particular political system.
Examples of Systematic Risk
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Hugo Chavez of Venezuela felt that some sectors specially
oil sector was overly dominated by foreign interests.His
government introduced a state policy that preferred
collectivism over individualism. Socialists reforms were
introduced and many institutions were nationalised
especially oil sector. It benefited local interests on the
expense of foreign investors.
In Argentina the newly elected government liberalised the
state-centred economy. Investors who accepted the risk
,prospered in Argentina.
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Procedural Political Risk
It reflects the costs of getting things done because of such
problems as government corruption, labor disputes, and/or a
partisan judicial system.
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Distributive Political Risk
Reflects revisions in such items as tax codes, regulatory
structure, and monetary policy imposed by governments in
order to capture greater benefits from the activities of foreign
firms.
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Catastrophic Political Risk
Includes those random political developments that adversely
affect the operations of all firms in a country. It can arise from
specific flashpoints such as ethnic discord, civil disorder or
war.
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Corporate Risk Officers and
International Bankers tend to get
insurances to protect them from
financial consequences of political
disorder. Berne Group holds up to
$113 billion in political risk.
Definition of a Legal System
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The mechanism for creating,
interpreting, and enforcing the laws in
a specified jurisdiction
Bases of Rules
Rule of Man
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Been around for long period of time
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The law was the will of the ruler
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King,Czar,Raja, emperor
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Today, Chairman, General,Supreme Leader etc.
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It places ultimate power in hands of one person ,making their
will a law no matter how unfair or unjust.
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This is a keystone of a totalitarian government.
Bases of Rules
Rule of Law
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Hallmark of a democratic system
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Written ,publicly disclosed laws that are adopted and enforced
using established procedures.
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IDEALLY, Rule of law establishes a just environment.
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Guarantees enforceability of commercial contracts and
business transaction.
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Safeguards personal property and individual freedom.
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No individual whether government official or private citizen
stands above the law.
IMPLICATIONS for MANAGERS
Many Western companies countries who work under rule of
law, face many difficulties in countries where system is more
inclined towards rule of man.
e.g. In China, legal action taken by foreign firms against local companies
that counterfeit their products has proved virtually useless. Writ,threats and
lawsuits get trapped in slow legal mechanisms. Usually thrown out on basis
of failure to register design “properly” or on some technical grounds.
Therefore, uncertainty about the basis of law in a particular
country creates challenging situations for managers.
Operational concerns that face
managers worldwide
Employing workers,getting credit,protecting investors,paying taxes,trading
across borders,enforcing contracts etc. Managers must be prepared
for difference of these procedures in foreign countries.
Starting a business
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In some countries start up procedures are less. e.g. in Brazil it took
an entrepreneur 150 days to start a new business. While in U.S in 1
week a company was set up along with bank accounts.
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Tax,Labour and Administrative declarations. Permits and Licenses
from various ministries.
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2 Days to start a business in Australia, while on average 77 days in
Chad.
Operational concerns that face
managers worldwide
Entering and enforcing contracts
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With Buyers and Sellers
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United Nations Conventions on Contracts for Int'l Sale of
Goods set guidelines for making and enforcing contracts
among businesses.
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Some countries require highly detailed and lengthy contracts
such as in U.K,U.S ,Australia. While in other such as Germany
,Finland shorter and less specific contracts are fine.
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Enforcement of contract take around 200 days in
Russia,South Korea,U.K (the speediest)
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While 600 to 1500 days for same activities in
Italy,Nigeria,Poland.
Operational concerns that face
managers worldwide
Hiring and firing local workers
In Practice hiring should be easy and firing should be extremely
burdensome.
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China has very flexible hiring and firing system and has great
discretion in setting employment conditions too(work
hours,min. wage,benefits).
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On the other hand, Angola,Belarus and Paraguay have rigid
restrictions on firing : company has to provide documentations
on the reasons for termination,established detailed firing
procedures and furnish both generous prior notifications and
payments.
Operational concerns that face
managers worldwide
Closing down the business
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Some companies fail : and some countries make the task of
closing down even more difficult.
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The English bankruptcy law of 1732. U.S introduced in 1800,
while France,Germany and Spain adopted bankruptcy laws in
early 19th century.
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Ireland,Japan,Canada and Hong Kong make closing down
business fast and cheap while its slowest and most expensive
in India,Philippines,Serbia,Chad,Panama.
Operational concerns that face
managers worldwide
General Relationships
Legal code of many countries foster a favourable operating
environment including fair taxes, easy access to credit and
straightforward employment.
The World Bank has a list of countries that according to their
criteria are most and least favourable for doing business.
According to this list , Singapore is at number 1.
Strategic concerns that face
managers worldwide
Firms have their strategic plans and a country's legal system &
basis of rule affect a company's operating decisions such as
,where to manufacture,how to market,how to protect its unique
features. Firms must take into account the legal environment.
Product safety and liability
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Companies often customise their products to comply with local legal
standards.
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Standards are sometimes higher, sometimes lower than home
country products. e.g. Civic may not have similar safety features in
Pakistan as compared to Japan.
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An electric home appliance may comply to strongest safety tests in
U.S while in India, it may not be an issue.
Strategic concerns that face
managers worldwide
Marketplace behavior
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National Laws also determine what is permitted in
pricing,distributing,advertising and promoting
products/services.
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E.g.,Cigarettes ads are prohibited in many countries. Ads
targeted at children are banned in some Scandinavian
counties. Comparative advertising is not allowed in Germany
while Chine prohibits comparison If it portrays negativity.
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Acceptable market behaviour can be unpredictable where rule
of man is basis of rule. e.g bribes for favouritism, manipulated
legal charges etc.
Strategic concerns that face
managers worldwide
Legal Jurisdiction
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A nation's court have the final decision on any matter that falls
within their jurisdiction.
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Usually a company urges a home-country court to claim
jurisdiction on the grounds that its likely to receive more
favourable treatment.
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That's why contracts usually contain “choice of law” clauses
stipulating the country whose laws will apply to dispute.
Strategic concerns that face
managers worldwide
Arbitration
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Both parties agree on an Impartial 3rd party to settle disputes.
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Most arbitration is governed by New York Convention of 1958
that allows parties to choose their own mediators and resolve
disputes.
Intellectual property
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Intangible property rights that are a
result of intellectual effort
Intellectual property rights refer to the
right to control and derive the benefits
from writing, inventions, processes and
identifiers
Local attitudes play a large role in
piracy