Governments are also motivated by economic factors to intervene in trade. The efficiency of enforcement of legal system is also lax in many low-income countries. How political and legal systems affect International Business Introduction Political and legal systems play a major role in the International businesses for the companies that source, produce, market and export products in foreign countries. In essence, there are three main kinds of legal systems—common law, civil law, and religious or theocratic law. A legal system based on traditions and precedence. Business Law. Read this article to learn about the Legal Environment for International Business. Authoritarian leaders tend not to have a guiding philosophy and use more fear and corruption to maintain control. Businesses in industries, such as commodities and oil, have found more authoritarian governments to be predictable partners for long-term access and investment for these commodities. Politics changes can affect dramatically the manner that international business deal with import, export, and trade with another countries. Disclaimer 9. A cross-country comparison on a 7.0 point scale as shown in Fig. Political factors constitute an important environment factor in International Business.Actually politics and economics are inter-related as one influences the other. This law is derived from the Marxist socialist system and continues to influence legal framework in former communist countries, such as the CIS, China, North Korea, Vietnam, and Cuba. United Nations Commission on International Trade Law (UNCITRAL). A country may also refuse entry to foreign citizens or restrict their travel. The most direct impact on business can be observed in Islamic law—which is a moral, rather than a commercial, legal system. 8.4 indicates that Denmark (6.5) had the highest level of efficiency of legal framework followed by Germany (6.3) and Switzerland (6.1) whereas it was considerably efficient in Singapore (6.0), Australia (5.9), the UK (5.8), Japan (5.6), South Africa (5.4), the US (4.9), and India (4.8). Foreign court systems have varying methods of enforcing ones rights. China’s expanding solar-energy industry is dependent on polycrystalline silicon, the main raw material for solar panels. All business transactions must avoid riba, i.e., excessive profit, loosely defined as interest. THE POLITICAL ENVIRONMENT (CH. Governments intervene in trade to protect their nation’s economy and industry, as well as promote and preserve their social, cultural, political, and economic structures and philosophies. Democracy has a number of variations, both in theory and practice, some of which provide better representation and more freedoms for their citizens than others. International managers need to understand the basic principles that govern the conduct of international law. In common law systems, judges interpret the law and judicial rulings can set precedent. In practice, countries use a combination of one or more of these systems and often adapt them to suit the local values and culture. A legal system based on a detailed set of laws that constitute a code and on how the law is applied to the facts. For instance, foreign governments have right to impose restrictions related to financial repatriation to other countries. It is based on traditions, past practices, and legal precedents set by the courts through interpretation of statutes, legal legislations, and past rulings. The thirteen largest oil companies (as measured by the reserves they control) in the world are all state-run and all are bigger than ExxonMobil, which is the world’s largest private oil company. Start studying International Business Chapter 3: Governmental and Legal Systems. (d) Business involving forbidden products or activity, such as alcohol, pork, or gambling is prohibited. (b) Gharar, the transaction involving fundamental uncertainty or speculation is prohibited. There is heavy reliance on settling disputes through third party negotiations rather than courts. Understanding the balance between China’s government structure and its ideology is essential to doing business in this complex country. The study of political systems is extensive and complex. For instance, an Indian citizen travelling abroad may be given a penalty by a court in India. Tariffs that are calculated as a percentage of the value of the product or service. What are three policy areas in which governments can create rules and regulations in order to control, manage, and intervene in trade. Content Filtrations 6. Courts can dismiss cases at their discretion, brought before them by foreigners. The most recent one emphasizes the government’s goal for China to become a technology powerhouse by 2020 and highlights key areas such as green technology, hence the solar industry expansion. For instance, in the common-law countries, the non-performance of a contract due to an ‘act of god’ may include floods, earthquakes, lightening, or similar happenings whereas under the civil law, non-performance is not limited to ‘acts of god’, but also includes ‘unavoidable interference with performance, whether resulting from forces of nature or unforeseeable human acts’, including such factors as labour strikes and riots. There is no consensus on how to measure democracy, definitions of democracy are contested and there is an ongoing lively debate on the subject. International Business: Strategy, Management, and the New Realities 11 Political and Legal Systems are Dynamic • Political and legal systems are dynamic, constantly changing and interdependent. The implications of Islamic law vary in terms of degree among the Islamic countries. The judiciary tends to be less adversarial in civil-law countries where little significance is accorded to legal precedence and traditions compared to common-law countries. The independence of a country’s judicial system from political influences of the members of governments, citizens, or firms is crucial for the fair treatment a firm receives in its overseas operations. is an economic system in which the means of production are owned and controlled privately. It governs a complete set of rules, regulations, institutions, and attitudes. besides the laws of individual countries. The most significant difference in the common law and the civil law countries is in the protection of intellectual property. Sharia has clear guidelines for aspects of life. International managers need to develop basic understanding of the types of legal systems followed in the countries of their operations before entering into legal contracts. Totalitarianism, a more extreme form of authoritarianism, occurs when an authoritarian leadership is motivated by a distinct ideology, such as communism. This is the national government and it has six State Governments under it. ‘Harmonization’ and ‘unification’ of the law of international trade refer to the process through which the law facilitating international trade is created and adopted. Although they in many ways they have kept to this reserved approach, globalisation has had its effect on Japan, like every other country. In some countries, the government controls more aspects of daily life than in others. Emerging economies still promise opportunity but also political risk for international businesses. Instead, most countries have a combination of both, the balance of which is often a reflection of the country’s history, culture, and religion. For example, some countries’ governments have tried to limit the influence of American culture on local markets by limiting or denying the entry of American companies operating in the media, food, and music industries. Clearly, many global businesses and investment banks are finding creative ways to do business with these Islamic banks so that they can comply with Islamic law while earning a profit. Nevertheless, countries still have the ability to regulate or strong-arm companies into abiding by their rules and regulations. China has successfully combined state intervention with private investment to develop a robust, market-driven economy—all within a communist form of government. Ch 6 7 international political and legal environment 1. Political and legal risk in international business . (f) Compassion is required when a business is in trouble. These are cultural, political and legal environments and the role each one plays. Despite the advances in democracy in recent decades, more than one third the world’s population still lives under authoritarian rule. If a new party comes into power, will the rules of business change dramatically? They may want to protect young industries or to preserve access to local consumer markets for domestic firms. Content Guidelines 2. A company may ask several questions regarding a prospective country’s government to assess possible risks: While any country can, in theory, pose a risk in all of these factors, some countries offer a more stable business environment than others. Legal Systems in International Business: The major types of legal systems are briefly mentioned here. The two major categories of prosecution under the national government are drug importation and those related to infringement of social security laws. Nations have the right to impose restriction upon foreign citizens on their rights to travel and stay, their conduct, or area of business operations. 8.3) with a score of 6.5 on a 7 point scale whereas Netherlands and Australia had a score of 6.4, the UK (6.0), Singapore (5.6), Japan and South Africa (5.5), India (5.3), the US (5.1), and UAE (5.0). Gambling is not liked in Islamic countries, but futures and currency hedging also involves speculation. In the case study in Chapter 1 "Introduction", you discovered how US-based Google had to deal with the Chinese government’s restrictions on the freedom of speech in order to do business in China. However, courts are bound to examine issues, such as the place from where evidence must be collected, location of the property under restitution, and the plaintiff. Some examples of these practices include forming joint-ventures, expanding your investment base, licensing your products/services, or political bargaining through lobbying. It governs its own territory, has the right to select and implement its own political, economic, and social systems and has the power to enter into bilateral or multilateral agreements with other nations. Log in Sign up. Germany had the highest level of judicial independence (Fig. Free trade advocates perceive this government-directed intervention as an unfair tilt against the global private sector. Religious lawAlso known as theocratic law; this legal system is based on religious guidelines. While many countries in Asia and Latin America also are functioning democracies, their stage of development impacts the stability of their economic and trade policy, which can fluctuate with government changes. Baidu self-censors and, as a result, has seen its revenues soar after Google limited its operations in the country.Rolfe Winkler, “Internet Plus China Equals Screaming Baidu,” Wall Street Journal, November 9, 2010, accessed December 21, 2010, http://online.wsj.com/article/SB10001424052748703514904575602781130437538.html. However, change can occur very quickly. International Business. The major types of legal systems are briefly mentioned here. The country’s view on capitalism is also a factor for business consideration. Understand government-business trade relations and how political and legal factors impact international business. The burden of proof is on the plaintiff. One entrepreneur, Zhu Gongshan, received $1 billion in funding, including a sizeable investment from China’s sovereign wealth fund, in record time, enabling his firm GCL-Poly Energy Holding to become one of the world’s biggest in less than three years. Most countries actually have a combination of these systems, creating hybrid legal systems. Source: Indonesia 2009: An official handbook Create . Democracy can be seen as a set of practices and principles that institutionalise and thus ultimately protect freedom. Even if a consensus on precise definitions has proved elusive, most observers today would agree that, at a minimum, the fundamental features of a democracy include government based on majority rule and the consent of the governed, the existence of free and fair elections, the protection of minorities and respect for basic human rights. Chinese government control on the Internet, for example, has helped propel homegrown, Baidu, a Chinese search engine, which earns more than 73 percent of the Chinese search-engine revenues. However, “in defense, power generation, telecoms, metals, minerals, aviation, and other sectors, a growing number of emerging-market governments, not content with simply regulating markets, are moving to dominate them.”Ian Bremmer, “The Long Shadow of the Visible Hand,” Wall Street Journal, May 22, 2010, accessed December 21, 2010, http://online.wsj.com/article/SB10001424052748704852004575258541875590852.html. The major difference between Sharia law and the Western law is the idea of reference to a precedent. The distinction between the common law and civil law is more in theory rather than in practice. The system of politics and government in a country; it governs a complete set of rules, regulations, institutions, and attitudes. Many observers note that it was the direct result of Chinese government intervention in what was deemed a key industry. The political and legal ystem in Australia: The Government of the Commonwealth of Australia is a federal one. The most commonly known example of religious law is Islamic law, also known as ShariaIslamic religious law that addresses all aspect of daily life; in terms of business and finance, the law prohibits charging interest on money and other common investment activities, including hedging and short selling.. Islamic law governs a number of Islamic nations and communities around the world and is the most widely accepted religious law system. It depends less on written statutes and codes. In order to enable Islamic investors to benchmark their investment on a regional basis and give product providers the opportunity to develop structured products tailored to the Islamic market, Standard & Poor’s (S&P), brings out Sharia Indices (Exhibit 8.4) that include only those stocks that comply with Sharia law. Business contracts tend to be detailed and specific with all contingencies elaborated in civil-law countries whereas contracts tend to be shorter and less specific in common-law countries. As the index provides for benchmarking with Sharia, some of these funds may be invested as per the Sharia Indices. The Indonesians enjoy a level of political freedom. In general, the greater the level of economic development of a country, the more elaborate is its legislative framework. Theocratic law is the legal system based on religious doctrine, precepts, and beliefs. There are more than thirteen major types of government and each type consists of multiple variations. China’s Communist Party outlines its goals in five-year plans. Laws concerning employment and labor affect managing of workforce in international markets. Although Japan is the world’s third larges economy, historically they have steered clear of international business. Multinationals now find themselves competing as never before with state-owned companies armed with substantial financial and political support from their governments.”Ian Bremmer, “The Long Shadow of the Visible Hand,” Wall Street Journal, May 22, 2010, accessed December 21, 2010, http://online.wsj.com/article/SB10001424052748704852004575258541875590852.html. Unlike in other countries, PRC law requires that only one person, to represent the company on its behalf. Different laws in foreign countries regulate financing or operations by foreigners. Effects of Politics onInternational business..... 2. What is capitalism? Privacy Policy 8. Another important issue for businesses that operate on an international level is the respect for the fundamental difference between legal systems. Chapter 4 "World Economies" provides more details about developed and developing countries and emerging markets. Table 2.1 The Major Global State-Owned Oil Companies. It may seem evident that businesses would prefer to operate in open, democratic countries; however, it can be difficult to determine which countries fit the democratic criteria. In contrast a planned economy is one in which the government or state directs and controls the economy. Domestic Chinese manufacturers received quick loans with favorable terms as well as speedy approvals. It is derived from the Roman law and is followed in most of continental Europe, Japan, and Latin America. Politically, a country’s government may seek to protect jobs or specific industries. Many are permitted to engage in sale-buyback or leaseback of an asset. Compare and contrast the two forms of economic ideology discussed in this section. What is a planned economy? Facing a shortage in 2007, growing domestic demand, and high prices from foreign companies that dominated production, China declared the development of domestic polysilicon supplies a priority. Introduction to International Legal Environment 2. Only two Asian countries are represented: Japan and South Korea. The legal system in a number of Islamic countries, including Saudi Arabia, and Iran is integrated with Sharia. Despite the movement toward privatizing industry and free trade, government interests in their most valuable commodity, oil, remains constant. A main differentiator of political systems is each system’s philosophy on the rights of the individual and the group as well as the role of government. Every country has jurisdiction over its citizens, irrespective of their locations. Under the Sharia, a ruling issued by a judge is not binding on other judges or on him in later cases. Why should businesses care about the different political and legal systems around the world? The national government enforces it own laws. A fair judicial system also reduces political risks in overseas markets. How do political and legal realities impact international trade, and what do businesses need to think about as they develop their global strategy? China is one of the more visible examples, with its strong government and limited individual rights. International Political Systems and Ideologies 3. It’s the most widespread legal system in the world. China’s ability to focus on dominating key industries inspires both fear and awe throughout the world. Under the Islamic law, western style finance is haram, or forbidden, to devout Muslims. It has prepared a wide range of conventions, model laws, and other instruments dealing with the substantive law that governs trade transactions or other aspects of business law influencing international trade. (i) Common Law: It is based on traditions, past practices, and legal precedents set by the courts through interpretation of statutes, legal legislations, and past rulings. To begin with, despite the globalization of business, firms must abide by the local rules and regulations of the countries in which they operate. While the common usage treats totalitarian and authoritarian as synonyms, there is a distinct difference. Introduction The political environment of countries is a criticalconcern for the international marketer. Civil lawA legal system based on a detailed set of laws that constitute a code and on how the law is applied to the facts. Firms operating internationally face major challenges in conforming to different laws, regulations, and legal systems in different countries. China is both an emerging market and a rising superpower. With its huge population, China is in constant need of energy to meet the needs of its people and businesses. There are more than thirteen major types of government, each of which consists of multiple variations. Jason Dean, Andrew Browne, and Shai Oster, “China’s ‘State Capitalism’ Sparks Global Backlash,”, http://graphics.eiu.com/PDF/Democracy%20Index%202008.pdf, http://online.wsj.com/article/SB10001424052748703514904575602781130437538.html, http://www.arabianbusiness.com/511804-gulf-islamic-banks-assets-to-hit-300bn, http://online.wsj.com/article/SB10001424052748704852004575258541875590852.html, http://www.energyintel.com/documentdetail.asp?document_id=245527, http://online.wsj.com/article/SB10001424052748703514904575602731006315198.html. Judicial Independence and Efficiency 3. Ownership is established by use in common law countries whereas it requires registration in the civil law countries. is the most common form of government around the world today. Although almost half of the world’s countries can be considered to be democracies, the number of “full democracies” is relatively low (only 30); 50 are rated as “flawed democracies.” Of the remaining 87 states, 51 are authoritarian and 36 are considered to be “hybrid regimes.” As could be expected, the developed OECD countries dominate among full democracies, although there are two Latin American, two central European and one African country, which suggest that the level of development is not a binding constraint. Why should businesses care about the different political and legal systems around the world? Is there a well-established legal environment both to enforce policies and rules as well as to challenge them? Any changes are usually a reflection of a changing economic environment, like the world economic crisis of 2008, and not a change in the government players. Nevertheless, global companies continue to seek the Chinese market, which offers much-needed growth and opportunity.Jason Dean, Andrew Browne, and Shai Oster, “China’s ‘State Capitalism’ Sparks Global Backlash,” Wall Street Journal, November 16, 2010, accessed December 22, 2010, http://online.wsj.com/article/SB10001424052748703514904575602731006315198.html. In the past thirty years, governments have increasingly privatized a number of industries. In the Persian Gulf region alone, there are twenty-two Sharia-compliant, Islamic banks, which in 2008 had approximately $300 billion in assets.Tala Malik, “Gulf Islamic Bank Assets to Hit $300bn,” Arabian Business, February 20, 2008, accessed December 21, 2010, http://www.arabianbusiness.com/511804-gulf-islamic-banks-assets-to-hit-300bn. However, in the past two decades, China has pursued a new balance of how much the state plans and manages the national economy. The United Nations Commission on International Trade Law (UNCITRAL) was established in 1966 by the UN General Assembly (Fig. A recent report exposed Brazil’s slow economic growth and rising inflation. Bureaucracy 5. For instance, an Italian firm that sells India’s defense secrets can be booked under the Indian law. 3. While the past century has seen a major shift toward free trade, many governments continue to intervene in trade. Within reason, in democracies, businesses understand that most rules survive changes in government. State Capitalism: Governments Seeking to Control Key Industries. This provision has generated an entire set of financial products and strategies to simulate interest—or a gain—for an Islamic bank, while not technically being classified as interest. State companies, like their private sector counterparts, get to keep the profits from oil production, creating a significant incentive for governments to either maintain or regain control of this very lucrative industry. As a part of international customs and traditions, there must be mutual respect for the laws, institutions, and the government system of other countries in the matter of jurisdiction over their own citizens. While the government still remains the dominant force by controlling more than a third of the economy, more private businesses have emerged.
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