Chapter Two The Political, Legal, and Technological Environment McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All Rights Reserved. The Political, Legal, and Technological Environment ❖ The specific objectives of this chapter are to 1. INTRODUCE the basic political systems that characterize regions and countries around the world and offer brief examples of each. 2. PRESENT an overview of the legal and regulatory environment in which MNCs operate worldwide. 3. REVIEW key technological developments as well as their impact on MNCs now and in the future. 2-3 Ideologies Individualism ❖Individualism ➢ People should be free to pursue economic and political endeavors without constraint. ❖David Hume, Adam Smith, Aristotle ❖In business context, similar to capitalism and connected to free market society ➢ Private property more successful, productive, and progressive than communal property ➢ Betterment of society related to level of freedom individuals have in pursuing economic goals 2-4 Ideologies Collectivism ❖Collectivism ➢ Views needs or goals of society as a whole as more important than individual desires. ❖Plato ❖Does not value individual as such ❖No rigid form of collectivism as societal goals differ greatly among cultures ➢ Fascism: nationalism, authoritarianism, militarism, corporatism, collectivism, totalitarianism 2-5 Ideologies Socialism ❖ Socialism ➢ A moderate form of collectivism in which there is government ownership of institutions, and profit is not the ultimate goal. ❖ Karl Marx, Friedrich Engels, Vladimir Ilyich Lenin ❖ Has been practiced in China, North Korea, Cuba ❖ Democratic socialism is the more moderate form ➢ practiced by Great Britain’s Labour Party, and in France, Spain, and Greece ❖ Communism is extreme form of socialist thought 2-6 Political Environment ❖ Ideologies underlie the actions of governments ➢ Ideas reflecting beliefs and values influencing the behavior and culture of nations and political systems ❖ Political systems can be evaluated along two dimensions 1. Rights of citizens based on a system of government (range democratic to totalitarian) 2. Focus of political system on individualism vs. collectivism. ❖ Democratic nations tend to emphasize individualism and totalitarian nations tend to emphasize collectivism ➢ No pure form of government 2-7 Political Systems Democracy ❖Democracy ➢ System in which government is controlled by citizens either directly or through elections. ❖European roots ❖Democratic society cannot exist without at least a two-party system ➢ Once elected, representative is held accountable to electorate for actions (which limits power of government) 2-8 Political System Totalitarianism ❖Totalitarianism ➢ Only one representative party which exhibits control over every facet of political and human life ❖Power maintained by suppression of opposition ➢ Dominant ideals include media censorship, political repression, denial of rights and civil liberties 2-9 Political Environment Regional Example: China ❖ Emerging economic power ❖ Government attempting to open up economy ➢ ➢ ➢ ➢ ➢ ➢ Speed up conversion of state enterprises into corporations Trade liberalization a top priority since joining WTO in 2001 Becoming a more open, democratic society Greater tolerance of individual freedoms Worker retraining, low-cost housing and other programs Seeking to unleash a more dynamic market economy 2-10 Political Environment: Regional Example: Europe ❖Privatization and economic liberalization reinforce EU-wide political and economic integration ➢ Political power is variable and complex ➢ Strong opposition to U.S.-led intervention in Iraq sometimes spill over into business relationships and dealings ❖Europe is a large interwoven region economically, but contains vast cultural differences 2-11 Political Environment: Example: The Middle East ❖In Iran and Saudi Arabia laws and government based on Islamic principles ❖Business conduct in Middle East similar to Western in many ways ➢ Worldwide fallout from war on terrorism have made business environment risky and potentially dangerous 2-12 Political/Economic Environment Risk Nationalization Expropriation Sovereign Immunity Confiscation Copyright © 2015 Taylor & Francis Group Occurs when a government forces the transfer of ownership from private to state control Occurs when a government compensates a company after nationalizing its assets The principle that no nation has the right to challenge the internal actions of another state, if that state has proceeded justly When nationalization of foreign firms occurs with little or no compensation offered 2–13 2-13 External Economic Relations as Risk Factors Tariffs Fees paid by an exporter to the country of import that increase the price of a foreign product or service relative to the domestic counterpart Export Controls Restrictions imposed by governments on what can be exported from a country Sanctions Sets of specific restraints imposed by governments on international trade Embargo Government-imposed unilateral prohibition of trade with another country Diversion Using an export license to provide materials to a third party not included on the license Boycott Copyright © 2015 Taylor & Francis Group Collaborative effort among countries to prohibit international trade with another nation 2–14 2-14 Political Environment: Example: Russia ❖Neglect and confusing changes in economic policy ❖Infrastructure is weak and a political quagmire ❖Corruption interferes with attraction of more foreign investment 2-15 Figure 2.1 International Legal Systems Type of Legal System Characteristics of the System Civil law • • • codified based on abstract principles predictable because of elaborate code Common law • • • based on precedent emphasis on procedures flexible Islamic law • • • religious/faith-based code codified and predictable applicable to daily life Communist/socialist law • • • based on ideology based on bureaucracy minimal private rights Sub-Saharan African law • • • community oriented based on custom group-based outcomes Asian law • • • social order/harmony stressed low use of legal mechanisms bureaucratized Copyright © 2015 Taylor & Francis Group 2–16 2-16 Legal and Regulatory Environment ❖Confusion and challenge for the MNC due to many different laws and regulations in global business operations ❖MNCs must carefully evaluate legal framework in each market before doing business 2-17 Legal Protection of Products Patents Trademarks Piracy and Counterfeiting Copyrights Copyright © 2015 Taylor & Francis Group 2–18 2-18 Global Foundations of Law 1. 2. 3. 4. Islamic law Socialist law Common law Civil or code law 2-19 Global Foundations of Law Islamic Law ❖Islamic law ➢ Derived from interpretation of Qur’an and teachings of Prophet Muhammad ➢ Found in Islamic countries: Middle East and Central Asia 2-20 Global Foundations of Law Socialist Law ❖Socialist law ➢ Origins in Marxist socialist system ➢ Requires most property to be owned by state or state enterprises ➢ Continues to influence regulations in former communist countries ❖Members of former Soviet Union ❖Peoples’ Republic of China ❖Vietnam ❖North Korea ❖Cuba 2-21 Global Foundations of Law Common Law ❖Common law ➢ Origins in English law ➢ Foundation of legal system for ❖United States ❖Canada ❖England ❖Australia ❖New Zealand 2-22 Global Foundations of Law Civil or Code Law ❖Civil or code law ➢ Derived from Roman law ➢ Found in non-Islamic and non-socialist countries ❖France ❖Some Latin American countries ❖Louisiana 2-23 Basic Principles of International Law ❖Sovereignty and Sovereign Immunity ❖International Jurisdiction ❖Doctrine of Comity ❖Act of State Doctrine ❖Treatment and Rights of Aliens ❖Forum for Hearing and Settling Disputes 2-24 Principles of International Law Sovereignty and Sovereign Immunity ❖Principle of sovereignty ➢ An international principle of law which holds that governments have the right to rule themselves as they see fit. 2-25 Principles of International Law International Jurisdiction ❖Nationality principle ➢ Holds that every country has jurisdiction over its citizens no matter where they are located. ❖Territoriality principle ➢ Holds that every nation has the right of jurisdiction within its legal territory. ❖Protective principle ➢ Holds that every country has jurisdiction over the behavior that adversely affects its national security, even if that conduct occurred outside the country. 2-26 Principles of International Law Doctrine of Comity ❖Doctrine of comity ➢ A jurisdictional principle of international law which holds that there must be mutual respect for the laws, institutions, and government of other countries in the matter of jurisdiction over their own citizens. 2-27 Principles of International Law Act of State Doctrine ❖Act of state doctrine ➢ A jurisdictional principle of international law which holds that all acts of other governments are considered to be valid by U.S. courts, even if such acts are illegal or inappropriate under U.S. law. 2-28 Principles of International Law Treatment and Rights of Aliens ❖Treatment and rights of aliens ➢ Countries have the legal right to refuse admission of foreign citizens and to impose special restrictions on their conduct, right of travel, where they can stay, and what business they may conduct. ➢ Nations can also deport aliens 2-29 Principles of International Law Forum for Hearing and Settling Disputes ❖Forum for hearing and settling disputes ➢ U.S. courts can dismiss cases brought before them by foreigners; however, they are bound to examine issues such as ❖where the plaintiffs are located ❖where the evidence must be gathered ❖where property to be used in restitution is located 2-30 Legal and Regulatory Issues ❖Financial and services regulation ❖Foreign Corrupt Practices Act ➢ Illegal to influence foreign officials through ❖personal payment ❖political contribution ❖Restrictive bureaucratization ❖Privatization 2-31 Regulation of Trade and Investment ❖Individual countries use legal and regulatory policies to affect the international management environment ❖Country is perceived to engage in unfair trade practices (WTO and similar agreements) ➢ Government support (subsidies) ➢ Require MNCs to accept local partners ❖Response may be ➢ Retaliatory tariffs ➢ Restrictive trade regulations 2-32 Technological Environment and Global Shifts in Production ❖Biotechnology ❖Nanotechnology ❖Satellites ❖Automatic translation telephones ❖Artificial intelligence and embedded learning technology ❖Advancements in computer chip technology ❖Supercomputers 2-33 Technological Environment and Global Shifts in Production ❖ E-business: ➢ ➢ ➢ ➢ Business to business (B2B) Business to consumer (B2C) E-tailing Financial services (e-cash) ❖ Telecommunications ❖ Technology, outsourcing and offshoring: ➢ Technology has reduced and eliminated middle management and white collar jobs ➢ Global competition has forced some MNCs to outsource jobs to offshore productions ➢ Emerging technology makes work more portable 2-34 Expected Winners and Losers in Selected Occupations 2-35 Review and Discuss 1. In what ways do different ideologies and political systems influence the environment in which MNC’s operate? 2. How do the following legal principles impact MNC operations: the principle of sovereignty, the nationality principle, the territoriality principle, the protective principle, and principle of comity? 3. How will advances in technology and telecommunications affect developing countries? Give some specific examples. 2-36
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