International
Business
Environments & Operations
Chapter 3
The Political and Legal
Environments Facing Business
Daniels
●
Radebaugh
●
Sullivan
3-1
Introduction
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Every country has its own political and legal
environment as an integral part of its operating
system
Companies must determine where, when, and
how to adjust their business practices without
undermining the basis for success
3 points to consider for IB:
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The principles and practices of home country
cannot be applied directly to a foreign country
Political and legal systems vary among countries
Opportunities and threats are handled and impact
differently within different political and legal
systems
3-2
Introduction
Political and Legal Factors Influencing International Business Operations
3-3
The Political Environment
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Managers evaluate, monitor, and forecast political
environments
A country’s political system refers to the
structural dimensions and power dynamics of its
government that specify institutions,
organizations, and interest groups, and define
the norms that govern political activities
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Includes complete set of institutions, political
organizations, and interest groups as well as the
relationship among institutions and political norms and
values
3-4
political system
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A Political system must integrate different groups
into a functioning self-sustaining, self-governing
society
It ensures level of stability in social relations and
unites a society in the face of diverse viewpoints
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An essential task of a political system is to integrate the
different elements into a functioning unit
It is effective when supported by legitimate
consensus of people who live under it
Important for IB:
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How officials exercise authority
Elect, monitor, and replace officials
Respect the rule of law
3-5
Government’s Role in a Society
Social equality or social hierarchy
 Individual liberty or collective security
 Jurisdiction in some or all areas of society
 Civil liberties allowed to citizens
 Remedies of redressing injustice
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3-6
Individualism vs. Collectivism
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Individualism
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primacy of the rights and role of the individual
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Limited role of political officials and agencies in social
transactions
Mainly rule of law; fair regulations; just competition
Collectivism
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primacy of the rights and role of the community
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Government intervenes in certain cases involving structure
of industries, conduct of companies, actions of managers– to
ensure that business practices benefit society
Officials establish both formal and informal
relationships with the business community
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Promote social equality, labor rights, workplace democracy
Government is connected and interdepedent with businesses
3-7
Political Ideology
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A political ideology stipulates how society ought
to function and outlines the methods by which it
will do so
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A system of ideas that expresses the goals, theories, and
aims of a socio-political program
Most modern societies are pluralistic
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Different groups or segments of society hold different,
perhaps competing, political ideologies
Two or more groups in a country differ in language, class,
structure, ethnicity, tribal groups, or religion
For example:
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Democrats vs. Republicans in the United States
Democratic Party vs. Liberal Party in Japan
3-8
Spectrum Analysis
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A way to profile similarities and differences while
figuring out where moderates fall between the two
anchors
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A political spectrum outlines the various forms
of political ideology
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For example: theocracy vs secularism, democracy vs totalitarianism
The distinguishing feature of political ideologies along the
political spectrum is freedom
Political freedom measures
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the degree to which fair and competitive elections occur
the extent to which individual and group freedoms are
guaranteed
the legitimacy ascribed to the general rule of law
3-9
the freedom expression
Spectrum Analysis
The Political Spectrum
3-10
Democracy
Democracy: A political system that endorses the rule of law and
grants the voting citizenry the power to alter the laws and
structure of the government, make decisions, and participate in
elections to express their decisions
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Government of the people, for the people, by the people
In a democracy
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all citizens are politically and legally equal
all are equally entitled to freedom of thought,
opinion, belief, speech, and association
all equally command sovereign power over public
officials
3-11
Types of democracy
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Representative
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Parliamentary
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Citizens elect representatives to a legislative branch of
government called parliament. The executive branch typically
consist of a cabinet headed by the prime minister. There is no
formal separation of powers between legislative and executive
branch
Multiparty
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People’s elective representatives hold ultimate sovereignty and
enjoy sufficient authority to deal directly and as they see fit
with changing circumstances
Three or more political parties control the government
Social democracy or democratic socialism

Use of democratic means to achieve a gradual transition from
capitalism to socialism
3-12
Totalitarianism
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A single agent (individual, group, party)
monopolizes power
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|Unquestioning support for official state ideology
No activities counter to the goals of the state
A totalitarian system subordinates the
individual to the interests of the collective
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dissent is eliminated through indoctrination,
persecution, surveillance, propaganda, censorship,
and violence
3-13
Types of totalitarianism
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Authoritarianism
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Fascism
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Secular
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Theocratic
3-14
Political Risk
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Political risk refers to 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: Change in political leadership where new
leader may adopt a different approach to management
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Procedural: risk arises from political actions, such as
public corruption, that interfere with transactions
between sellers and buyers and that can raise the costs
of getting things done
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Distributive: As businesses prosper, the officials seek
ways to greater share of rewards
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Catastrophic: Random political developments, ethnic
discord, civil disorder, or war
3-15
Classifying Political Risk
Characteristics of Political Risk
3-16
The Legal Environment
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The legal system is the mechanism for creating,
interpreting, and enforcing the laws in a specified
jurisdiction
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Specifies the rules that regulate behavior
Ensures that a society can pursue economic and social
development and when disagreements arise, resolve them
without collapsing to anarchy
Purpose: establish a comprehensive legal network to regulate
social activities
Three components
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Constitutional law sets the framework for the system of
government and defines the authority and procedures of
political bodies-- to guarantee open and just political order
Criminal law to safeguard social order
Civil and commercial laws to ensure fair and efficient
business transactions
3-17
Types of Legal Environments
Common law
 Civil law
 Theocratic law
 Customary law
 Mixed systems
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3-18
Legal Systems: Bases of Rule
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What is the basis of rule in a country?
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The rule of man
 legal rights derive from the individual who
commands the power to impose them
 associated with a totalitarian system
The rule of law
 systematic and objective laws applied by
public officials who are held accountable for
their administration
 associated with a democratic system
3-19
Operational Concerns
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Operational issues
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Starting a business
Making and enforcing contracts
Hiring and firing local workers
Closing down the business
In general
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rich countries regulate less
poor countries regulate more
3-20
Strategic Concerns
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Country Characteristics
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Product safety and liability
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Legal jurisdiction
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Intellectual property
3-21
Intellectual Property:
Rights and Protection
Intellectual property refers to creative
ideas, expertise, or intangible insights that
grant its owner a competitive advantage
 Intellectual property rights refer to the
right to control and derive the benefits
from writing, inventions, processes, and
identifiers
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no “global” patent, trademark or copyright
exists
3-22
Intellectual Property:
Rights and Protection
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Attitudes towards intellectual property
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Historical legacies
 rule of man versus rule of law
Economic circumstances
 levels of economic development
Cultural orientation
 individualism versus collectivism
3-23