Pressure groups tend to change government policies. Another important issue for businesses that operate on an international level is the respect for the fundamental difference between legal systems. besides the laws of individual countries. In the broadest sense, capitalismAn economic system in which the means of production are owned and controlled privately. Trade Embargos and Sanctions 4. Sullivan 3-1 fChapter 3 The Political and Legal Environments Facing Business Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 3-2 fLearning Objectives If a new party comes into power, will the rules of business change dramatically? In this system, judges interpret the law and judicial rulings can set precedent. International law recognizes the sovereign right of anation to allow or deny foreign firms to conduct. A closer look at the solar industry in China illustrates the government’s ability to create new industries and companies based on its objectives. What is a planned economy? Firms need to assess the balance to determine how local policies, rules, and regulations will affect their business. The most direct impact on business can be observed in Islamic law—which is a moral, rather than a commercial, legal system. In general, Japanese corporate law supports inward facing investment. 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. Neither extreme exists in its purest form in the real world. Germany had the highest level of judicial independence (Fig. Start studying International Business Chapter 3: Governmental and Legal Systems. It governs a complete set of rules, regulations, institutions, and attitudes. Differences in the social, cultural, economic, legal and political conditions of the country affect international business procedures in different levels and degree depending on the countries infrastructure and relationship. Effects of Politics onInternational business..... 2. This also implies that courts of a sovereign country cannot be used to rectify its injustices on other countries. For instance, an Indian citizen travelling abroad may be given a penalty by a court in India. For example, if a company wants to borrow money from an Islamic bank, it would sell its assets or product to the bank for a fixed price. However, in the past two decades, China has pursued a new balance of how much the state plans and manages the national economy. Under the Islamic law, western style finance is haram, or forbidden, to devout Muslims. China is one of the more visible examples, with its strong government and limited individual rights. China’s different set of political and legal guidelines made Google choose to discontinue its mainland Chinese version of its site and direct mainland Chinese users to a Hong Kong version. In current times, the Chinese government has been using a combination of government loans and investment in Africa to obtain access for Chinese companies to utilize local resources and commodities. As a result, global businesses monitor and evaluate the political and legal climate in countries in which they currently operate or hope to operate in the future. Instead, most countries have a combination of both, the balance of which is often a reflection of the country’s history, culture, and religion. State-owned companies control more than 75 percent of all crude oil production, in contrast with only 10 percent for private multinational oil firms.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; “Really Big Oil,” Economist, August 10, 2006, accessed December 21, 2010, http://www.economist.com/node/7276986. With its huge population, China is in constant need of energy to meet the needs of its people and businesses. In some countries, the government controls more aspects of daily life than in others. Capitalism is an economic system in which the means of production are owned and controlled privately. Islamic 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. 2. In countries, such as Japan, the reliance on courts for conflict resolution is much lower compared to the US which is considered to be one of the most litigious societies in the world. National security issues can impact both the import and exports of a country, as some governments may not want advanced technological information to be sold to unfriendly foreign interests. While the common usage treats totalitarian and authoritarian as synonyms, there is a distinct difference. Classic Sharia manuals are divided in four parts: laws related to personal acts of worship, laws related to commercial dealings, laws related to marriage and divorce, and penal laws. There are more than thirteen major types of government and each type consists of multiple variations. It is extremely important for certain agreements in civil law countries to get registered, in order to be enforceable, whereas in common law countries, as long as the proof of the agreement can be established, an agreement is binding. Chapter 4 "World Economies" provides more details about developed and developing countries and emerging markets. (d) Business involving forbidden products or activity, such as alcohol, pork, or gambling is prohibited. China is both an emerging market and a rising superpower. The level of judicial independence and efficiency differs widely among countries. Firms operating internationally face major challenges in conforming to different laws, regulations, and legal systems in different countries. The efficiency of enforcement of legal system is also lax in many low-income countries. 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. On the other hand, governments may influence trade to reward a country for political support on global matters. Let’s focus briefly on how the political and economic ideologies that define countries impact their legal systems. Under international law, there are three basic types of jurisdictional principles. The interest-bearing accounts and loans, which fall under the strict ribamles, most futures and options, which are considered speculative and gharar, and insurance, because the outcome of the contract can no way be determined beforehand , are all haram. The history of the oil industry shows how various governments have, on occasion, protected their national companies’ access to oil through political force. Government-business trade relations are the relationships between national governments and global businesses. 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). 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. 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. The country’s population democratically elects open government system. Each political system’s philosophy impacts the policies that govern the local economy and business environment. The complexity of trade in these situations increases, as throughout history, governments have come to the aid and protection of their nation’s largest business interests in markets around the world. Democratic governments derive their power from the people of the country either by direct referendum, called a direct democracy, or by means of elected representatives of the people, known as a representative democracy. China’s ability to focus on dominating key industries inspires both fear and awe throughout the world. Its leaders see the economy as a tool to preserving the state’s power, which in turn is essential to maintaining stability and growth and ensuring the long-term viability of the Communist Party.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. 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. According to the Federal Constitution, the States have administrative competence or remaining competence to all subjects that are not privative of the Union and the Municipalities. Why should businesses care about the different political and legal systems around the world? Differences in legal systems can affect the attractiveness of a country as market or investment site. What businesses must focus on is how a country’s political system impacts the economy as well as the particular firm and industry. For instance, the Hebrew law and the Islamic law are derived from religious doctrines and their scholarly interpretations. In the past thirty years, governments have increasingly privatized a number of industries. There are generally two legal regimes – the Civil law and the Common law systems. The burden of proof is on the plaintiff. The legal system in a number of Islamic countries, including Saudi Arabia, and Iran is integrated with Sharia. The legal framework was the least efficient in Venezuela (1.5) and had relatively low level of efficiency in Russian Federation (2.8), Brazil (2.9), China (3.6), Tanzania (3.7), and Thailand (4.4). This could lead to rioting and looting and general disorder, which disrupts the operations of a business. A political ideology that asserts that both public and private groups are important in a well-functioning political system. This contrasts with more authoritarian governments, where democracy is either not in effect or simply a token process. China, for instance, has generally followed ‘rule by man and not by law’, the tradition of which still remains despite the country developing a model legal system. 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. While doing business in Islamic countries, international managers need to appreciate the intertwining of religion and Islamic law and take care never to mention the Palestine-Israeli situation. As a result of rise in terrorism during the last decade, the US and many European countries have imposed restrictions on foreigners. Although there is significant overlapping in practice under the two systems, laws are much more rigid in the countries with civil-law system compared to common-law systems. Religious lawAlso known as theocratic law; this legal system is based on religious guidelines. For example, in Islamic law, business is directly impacted by the concept of interest. Source: Indonesia 2009: An official handbook It is based on traditions, past practices, and legal precedents set by the courts through interpretation of statutes, legal legislations, and past rulings. Sharia is the canonical law derived from a combination of sources, such as the Koran, the holy book of Islam, the Sunna, teachings and practices of the prophet Mohammed, and the fat was, the rulings of the Islamic scholars. As a result, the government has placed a priority on energy related technologies, including solar energy. This system is commonly referred to as “a socialist market economy with Chinese characteristics.” The Chinese are eager to portray their version of combining an authoritarian form of government with a market-oriented economy as a better alternative model for fledging economies, such as those in Africa. All business transactions must avoid riba, i.e., excessive profit, loosely defined as interest. 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. Laws concerning employment and labor affect managing of workforce in international markets. 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. Governments have several key policy areas that can be used to create rules and regulations to control and manage trade. At the same time, an agreement would be signed for the bank to sell back the assets to the company at a later date and at a higher price. Before publishing your articles on this site, please read the following pages: 1. 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 2: National Differences in Political, Economic, and Legal Systems. is also known as theocratic law and is based on religious guidelines. 4. They may want to protect young industries or to preserve access to local consumer markets for domestic firms. Political, Economic, and Legal Systems. 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. The salient features of Islamic law concerned to business are that. For example China worked a serious restructuration on their politics and regulations with the international companies, which include better conditions of work for the local employees. Introduction to International Legal Environment 2. Plagiarism Prevention 4. Within reason, in democracies, businesses understand that most rules survive changes in government. Log in Sign up. Business Law. A political systemThe system of politics and government in a country; it governs a complete set of rules, regulations, institutions, and attitudes. International law is less coherent compared to domestic law since it embodies a multiplicity of treaties (bilateral, multilateral, or universal) and conventions (such as the Vienna Convention on Diplomatic Security, Geneva Convention on Human Rights, etc.) Democracy is the most common form of government today. Written contracts have a sanctity and legitimacy of their own. 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). Legal Systems 4. Ch 6 7 international political and legal environment 1. ‘Harmonization’ and ‘unification’ of the law of international trade refer to the process through which the law facilitating international trade is created and adopted. TOS 7. The Sharia regulates all human actions and places them in five categories, i.e., obligatory, recommended, permitted, disliked, or forbidden. Although they in many ways they have kept to this reserved approach, globalisation has had its effect on Japan, like every other country. is based on a detailed set of laws that constitute a code and focus on how the law is applied to the facts. 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. Political and legal risks are two very important aspects of running a business of which an entrepreneur should be aware. Every country has the right of jurisdiction within its own legal territory. Until recently, governments were able to directly enforce the rules and regulations based on their political and legal philosophies. Politically, a country’s government may seek to protect jobs or specific industries. Despite the advances in democracy in recent decades, more than one third the world’s population still lives under authoritarian rule. Terrorism, Crime, and Violence. A legal system based on traditions and precedence. The extent of separation of judicial powers between the judiciary and the public authorities varies considerably across nations. Principles of International Law 5. To begin with, despite the globalization of business, firms must abide by the local rules and regulations of the countries in which they operate. 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. Partnership is preferred over hierarchical claims. Totalitarianism, a more extreme form of authoritarianism, occurs when an authoritarian leadership is motivated by a distinct ideology, such as communism. Although Japan is the world’s third larges economy, historically they have steered clear of international business. Under the Sharia, a ruling issued by a judge is not binding on other judges or on him in later cases. 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. Laws of most countries have elements of both common and civil law. Examples include changes in interest rates, civil unrest, government actions and issues with importing or exporting goods. Authoritarian governments centralize all control in the hands of one strong leader or a small group of leaders, who have full authority. Socialist law traditionally advocates ownership of most property by the state or state-owned public enterprises, prohibiting free entry to foreign firms. How do political and legal realities impact international trade, and what do businesses need to think about as they develop their global strategy? For instance, foreign governments have right to impose restrictions related to financial repatriation to other countries. Governments and politics play a large role in international business. On the one hand, as evident in the powerful Ministry of International Trade and Industry, better Anyone planning on doing business in Japan should bear in mind that prefectures and municipalities may create laws and ... Retrieve Full Source. Tariffs that are calculated as a percentage of the value of the product or service. It depends less on written statutes and codes. Courts can dismiss cases at their discretion, brought before them by foreigners. These are cultural, political and legal environments and the role each one plays. DemocracyA form of government that derives its power from the people. A cross­-country comparison on a 7.0 point scale as shown in Fig. Contrary to the approach of much of the world, which is moving more control to the private sector, China has steadfastly maintained its state control. Cultural and social factors might also impact a government’s intervention in trade. Economist Intelligence Unit, “The Economist Intelligence Unit’s Index of Democracy 2008,” Economist, October 29, 2008, accessed December 21, 2010, http://graphics.eiu.com/PDF/Democracy%20Index%202008.pdf. Also known as code or civil law, it is based on a comprehensive set of written statutes. 6) The Sovereignty of NationsThe Sovereignty of Nations Ultimate power of the stateUltimate … Source: Energy Intelligence Group, “Petroleum Intelligence Weekly Ranks World’s Top 50 Oil Companies (2009),” news release, December 1, 2008, accessed December 21, 2010, http://www.energyintel.com/documentdetail.asp?document_id=245527. Democracy presupposes equality before the law, due process and political pluralism.“Liberty and Justice for Some,” Economist, August 22, 2007, accessed December 21, 2010, http://www.economist.com/node/8908438. Gambling is not liked in Islamic countries, but futures and currency hedging also involves speculation. is the most common form of government around the world today. As political systems in different areas vary, the political impact differs. Whether the motive is economic (i.e., profit) or political (i.e., state control), “foreign firms and investors find that national and local rules and regulations are increasingly designed to favor domestic firms at their expense. This new combination has also posed more questions for businesses that are encountering new issues—such as privacy, individual rights, and intellectual rights protections—as they try to do business with China, now the second-largest economy in the world behind the United States. While the past century has seen a major shift toward free trade, many governments continue to intervene in trade. Is there a well-established legal environment both to enforce policies and rules as well as to challenge them? In contrast a planned economy is one in which the government or state directs and controls the economy. President Rousseff started a program called Brasil Maior in order to promote industry in the nation. 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. Understanding the balance between China’s government structure and its ideology is essential to doing business in this complex country. The national government enforces it own laws. The major types of legal systems are briefly mentioned here. Create . 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. Every country has jurisdiction over its citizens, irrespective of their locations. This combination is called pluralism, which asserts that both public and private groups are important in a well-functioning political system. 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. Therefore, a foreign firm involved in illegal business practices in India can be sued under Indian law. As shown in the opening case study, China is using its economic might to invest in Africa. Some banks will charge a large up-front fee. The major difference between Sharia law and the Western law is the idea of reference to a precedent. To further illustrate the complexity of the definition of a democracy, the Economist Intelligence Unit’s annual “Index of Democracy” uses a detailed questionnaire and analysis process to provide “a snapshot of the current state of democracy worldwide for 165 independent states and two territories (this covers almost the entire population of the world and the vast majority of the world’s independent states (27 micro states are excluded) [as of 2008)].”Economist Intelligence Unit, “The Economist Intelligence Unit’s Index of Democracy 2008,” Economist, October 29, 2008, accessed December 21, 2010, http://graphics.eiu.com/PDF/Democracy%20Index%202008.pdf. 8.5) with the aim to reduce obstacles in international trade. Democratic governments derive their power from the people of the country, either by direct referendum (called a direct democracy) or by means of elected representatives of the people (a representative democracy). A political ideology that contends that every aspect of an individual’s life should be controlled and dictated by a strong central government. Copyright 10. However, history demonstrates that, for some industries, global firms have chosen to do business with countries whose governments control that industry. Under this jurisdiction principle of international law, all acts of other governments are considered to be valid by a country’s court, even if such acts are not appropriate in the country. A person is innocent unless proved guilty. Different laws in foreign countries regulate financing or operations by foreigners. In this system, judges interpret the law and judicial rulings can set precedent. For instance, an Italian firm that sells India’s defense secrets can be booked under the Indian law. Common law originated from England and it is followed in most of the former British colonies, such as India, UK, the US, Canada, Australia, and New Zealand. Before we can evaluate the impact on business, let’s first look at the different political and legal systems. madison_mainman. is one in which the government or state directs and controls the economy, including the means and decision making for production. In common law systems, judges interpret the law and judicial rulings can set precedent. On the other hand, Japan is considered to be a ‘non-contractual’ society where contracts signed represent general understanding and are subject to change depending upon the circumstance. A recent report exposed Brazil’s slow economic growth and rising inflation. 6)THE POLITICAL ENVIRONMENT (CH. 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. China’s Communist Party outlines its goals in five-year plans. Introduction to International Legal Environment: United Nations Commission on International Trade Law (UNCITRAL). STUDY. The Indonesians enjoy a level of political freedom. Some industries may be considered essential for national security purposes, such as defense, telecommunications, and infrastructure—for example, a government may be concerned about who owns the ports within its country. 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. Business Law 3 of China’s Business Law Trends For Expatriates to Beware of: 1) The legal representative of a company gets to make decisions.