Legal, Technological, Accounting, and
Political Environments
Griffin & Pustay
3-1
International Business, 6th Edition
chapter 3
Chapter Objectives
• Describe the major types of legal
systems confronting international
businesses
• Explain how domestic laws affect
the ability of firms to conduct
international business
• List the ways firms can resolve
international business disputes
3-2
Chapter Objectives (continued)
• Describe the impact of the host
country’s technological environment
on international business
• Identify the factors that influence
national accounting systems
• Explain how firms can protect
themselves from political risk
3-3
The Legal Environment
While domestic firms must follow
laws and customs of the home
country, international businesses
must obey laws of the home country
and all host countries.
3-4
Legal Systems
Common Law
Civil Law
Religious Law
Bureaucratic Law
Common Law
• Based on wisdom of judges’
decisions on individual cases
through history
• Cases create legal precedents
Countries Using Common Law
• United States
• Barbados
• Canada
• Saint Kitts
• Australia
• Nevis
• India
• Malaysia
• New Zealand
3-7
Civil Law
• Based on codification of what is and
is not permissible
• Originated in biblical times with the
Romans
• Reinforced by French Napoleonic
code
• Judge determines scope of
evidence collected and presented
3-8
Religious Law
• Based on the officially established
rules governing faith and practice of
a particular religion
• A country that applies religious law
to civil and criminal conduct is called
a theocracy
3-9
Bureaucratic Law
Bureaucratic
law is the
legal system
in communist
countries and
in
dictatorships.
3-10
Laws Affecting
International Business Transactions
Sanction
Embargo
Extraterritoriality
3-11
Laws Directed Against Foreign Firms
3-12
Nationalization
Expropriation
Confiscation
Privatization
Economic and Political Impacts of
MNCs on Host Countries
• Advantages
– Greater selection
– Competition
– Higher standards
– Job loss
– Job creation
– Dependency on
economic health
of MNC
– Tax benefits
– Technology
transfers
3-13
• Disadvantages
– Political power
Cultural Impacts of MNCs on
Host Countries
• Advantages
– Improved standard
of living
– Better health care
– Abuse of less
developed policies
in the areas of
safety and
environmental
concerns
– More sanitary food
products
– Negligent product
offerings
– Introduction of
new products
3-14
• Disadvantages
Dispute Resolution
• Which country’s law applies?
• In which country should the issue be
resolved?
• Which technique should be used to
resolve the conflict?
• How will the settlement be
enforced?
3-15
Principle of Comity
• A country will honor and enforce within its
own territory the judgments of foreign
courts
• Conditions of the principle:
– Reciprocity is extended
– Defendant is given proper notice
– Judgment does not violate domestic
statutes or treaty obligations
3-16
Arbitration
Arbitration is the process by which
both parties to a conflict agree to
submit their cases to a private
individual or body whose decision
they will honor.
3-17
The Technological Environment
Protection
of the IPR
Infrastructure
Resources
Low-cost
labor
Skilled
labor
3-18
Agricultural
land
Rich
natural
resources
Intellectual Property
• Patents
• Copyrights
• Trademarks
• Brand names
3-19
Intellectual property
often forms the basis of
a firm’s competitive
advantage!
International Treaties Protecting
Intellectual Property Rights
• International Convention for the
Protection of Industrial Property
Rights (i.e., the Paris Convention)
• Berne Convention for the Protection
of Literary and Artistic Works
• Universal Copyright Convention
• Trade-Related Intellectual Property
Rights Agreement
3-20
The Accounting Environment
The Roots of National Differences
• GAAP - Generally Accepted
Accounting Principles
3-21
Figure 3.1 Influences on a
Country's’ Accounting System
3-22
The Accounting Environment
Differences in Accounting Practices
• Valuation and Revaluation of Assets
• Valuation of Inventories
• Dealing with Tax Authorities
• Use of Accounting Reserves
3-23
The Accounting Environment
(continued)
Other Differences
• Capitalization of Financial Leases
• Preparation of Consolidated
Financial Statements
• Capitalization of Research and
Development expenses
• Treatment of Goodwill
3-24
The Accounting Environment
(concluded)
Impact of Capital Markets
• International Financial Reporting
Standards
3-25
The Political Environment
Political Risk
Ownership
risk
Operating
risk
3-26
Transfer
risk
Table 3.2 Examples of
Political Risks
• Expropriation
• Inflation
• Confiscation
• Kidnappings,
terrorist threats
• Campaigns
against foreign
goods
• Mandatory labor
benefits legislation
• Civil wars
3-27
• Repatriation
• Currency
devaluations
• Increased taxation
Levels of Political Risk
Macropolitical
risk
3-28
Micropolitical
risk
Firms Need to Answer
These Questions
• Is the country a democracy or dictatorship?
• Does the country rely on free market or
government controls?
• Does the government view foreign firms as a
positive influence?
• Are the firm’s customers private or public?
• Does the government act arbitrarily?
• Is the existing government stable?
3-29
Map 3.3 Countries Relative to
Political Riskiness, 2008
3-30
Insurance Against Political Risks
• Overseas Private Investment
Corporation (OPIC)
• Multilateral Investment Guarantee
Agency (MIGA)
3-31