Last Updated 11 May 2020

International Business Management

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A political system is the complete set of institutions, political organizations, and interest groups, the relationships among those Institutions, and the political norms and rules that govern their functions. Thus, It Integrates the various parts off society into a viable, functioning entity. It also influences the extent to which government intervenes in business and the way in which business is conducted both domestically and internationally. The ultimate test of any political system is its ability to hold a society together. A.

Individualism and Collectivism It is useful to profile the similarities and differences among political systems according to the general orientation within a society about the primacy of the rights and role of the Individual versus that of the larger community. Under an individualistic paradigm (e. G. , the united States), political officials and agencies play a limited role in society. The relationship between government and business tends to be adversarial; government may intervene in the economy to deal with market defects, but generally it promotes marketplace competition.

Under a collectivist paradigm, whether democratic (Japanese) or authoritarian (Chinese) In nature, the overspent defines economic needs and prolepses, and it partners with business In major ways. Government Is highly connected to and Interdependent with business: the relationship is cooperative. B. Political Ideology A political ideology is the body of constructs, theories, and aims that constitute a sociopolitical program (e. G. , liberalism or conservatism). Pluralism indicates the coexistence of a variety of ideologies within a particular society.

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Although shared ideologies create bonds within and between countries, differing Ideal-goes tend to split collates apart. The two extremes on the political spectrum are democracy and totalitarianism. C. Democracy. A democracy represents a political system in which citizens participate in the decision-making and governance process, either directly or through elected representatives. Contemporary democracies share the following characteristics: an independent and fair court system; a nonpolitical bureaucracy and defense infrastructure; and citizen access to the decision-making process. In decentralized democracies, e. . , Canada and the United States, companies may face different and sometimes even conflicting laws from one state or province to another. ) The defining heuristics of democracy is freedom. Measures of political rights and civil liberties have been developed to assess levels of freedom; a country may be rated as free, partly free, or not free. D. Totalitarianism. Totalitarianism represents a political system in which citizens seldom, if ever, participate in the decision-making and governance process; power is monopolized by a single agent and opposition is neither recognized nor tolerated.

In theocratic totalitarianism, religious leaders are also the political leaders. In secular totalitarianism, the government imposes order through military power. Variants of totalitarianism include authoritarianism and fascism. E. Trends in Political Systems. Several factors have powered the demagnification of the world. First, many totalitarian regimes failed to improve the economic lives of their citizens, who eventually challenged the right of the state to govern. Second, vastly improved communications technology weakened the ability of regimes to control people's access to information.

Third, many people who champion democracy truly believe that greater political freedom leads to economic freedom and higher standards of living. Although the world is experiencing general movements towards democracy and more open economies, this does not necessarily indicate an increasing homogeneities of political systems. In fact, "differentials", I. E. , the clash of civilizations, refers to the argument that apparently innate and largely irreconcilable differences among cultures can trigger a backlash against Western ideas regarding political rights and civil liberties. F. Political Risk.

Political risk reflects the expectation that the political climate in a country will change in such a way that a firm's operating position or investment value will deteriorate. Leading sources of political risk are: expropriation or nationalization, international war or civil strife, unilateral breaches of contract, destructive governmental actions, harmful actions against people, restrictions on the repatriation of profits, differing points of view, and discriminatory taxation policies. The following types of political risk range from the least to the most destructive. 1. Systemic Political Risk.

Systemic political risk creates risks that affect all firms because of a change in public policy. However, such changes do not necessarily reduce potential profits. 2. Procedural Political Risk. Procedural political risk reflects the costs of getting things done because of such problems as government corruption, labor disputes, and/or a partisan Judicial system. 3. Distributive Political Risk. Distributive political risk reflects revisions in such items as tax codes, regulatory structure, and monetary policy imposed by governments in order to capture greater benefits from the activities of foreign firms. 4. Catastrophic Political Risk.

Catastrophic political risk includes those random political developments that adversely affect the operations of Ill. THE LEGAL ENVIRONMENT A legal system is the mechanism for creating, interpreting, and enforcing the laws in a specified Jurisdiction. It is the means and methods a country uses to regulate business practices, define how companies conduct business transactions, specify the rights and obligations of those engaged in business transactions, and spell out the methods of legal redress for those who believe they have been wronged. Generally, legal systems fall into one of the following categories: ; Common law.

Common law originated in the United Kingdom and is based upon tradition, Judge-made recent, custom, and usage; therefore, courts play an important role in interpreting the law. Common-law nations include Australia, Britain, Canada, New Zealand, and the United States. ; Civil law. Civil law, aka Roman law, originated with the Romans and is based upon a detailed set of laws that comprise a code that includes rules for conducting business; therefore, courts play an important role in applying the law. Civil law nations include France, Germany, and Japan. ; Theocratic law.

Theocratic law is based upon religious precepts; ultimate legal authority is conferred upon religious leaders who govern society. The best example is Islamic law, or Shari's, which is based on the Koran, the Saunas, the writings of Islamic scholars, and the consensus of Muslim countries' legal communities. (The key for business success is to adhere to the constraints of ancient Islamic laws while maintaining sufficient flexibility to operate in a modern global economy. ) ; Customary law. Customary law anchors itself in the wisdom of daily experience or great spiritual or philosophical traditions.

Customary law may play a significant role in matters of personal conduct in countries with mixed legal systems. ; Mixed Legal System. A mixed legal system emerges when two or more legal systems are used within a single country. Although the majority of such countries are found in Africa and Asia, the United States' legal system combines both common and civil law. 'V. LEGAL ISSUES IN INTERNATIONAL BUSINESS National laws may affect day-to-day operations and a firm's long-term competitive- news both within and beyond a country's borders and pertain to both domestic and foreign firms.

Areas addressed include health and safety standards, employment practices, antitrust prohibitions, contractual relationships, environmental practices, intellectual property, cross-border investment flows, tariffs, and non-tariff barriers, to name but a few. In addition, international treaties among nations may also affect the nature and extent of business operations. A. Operational Concerns Efforts to start a business, to enter and enforce contracts, to hire and fire employees, and to close a business are all affected by national laws and regulations.

While there appears to be an inverse relationship between a country's per capita income and its tendency to regulate business, the legal systems of the more highly developed entries tend to regulate the major operational features of business activity more consistently than do the less developed nations. Further, those countries that make it easy to start a business also tend to impose fewer and simpler regulations to hire B. Strategic Concerns Many legal issues affect the process of value creation. The following legal contingencies often shape an international competitor's strategic plans. . Product Safety and Liability. Often products must be customized in order to comply with local standards, which may be higher than those found in a firm's home market. While reduce liability laws are very stringent in markets such as the United States, they are spotty, absent, and at times even arbitrary in many less developed countries. 2. Marketplace Behavior. National laws determine permissible practices in pricing, distribution, advertising, and the promotion of products, and they vary widely from one country to another. 3. Product Origin.

Local content is important to all nations, and most countries push foreign firms to add value locally. In addition, product origin determines applicable fees and may be subject to quantitative restrictions as well. 4. Legal Jurisdiction. Every country specifies which law should apply and where litigation should occur when agents are involved-?whether they are legal residents of the same or different countries. 5. Arbitration. Most arbitration is governed by the New York Convention, a protocol specified in 1958 that allows parties to choose their own mediators and resolve disputes on neutral ground.

C. Intellectual Property Rights Intellectual property rights (APRs) consist of ownership rights to intangible assets, I. E. , the right to control and derive the benefits from writing and other creative art forms (copyright), inventions (patents), and identifiers (trademarks). Problems arise because intellectual property, whether in the form of literature, music, design, software, scientific patents, or brand names, is difficult to create but easy to duplicate. Cross-national and cross-cultural legal differences complicate specifying, regulating, and enforcing intellectual property rights.

The costs of piracy, whether in terms of lost sales and royalties or future creativity, are very high for registered owners. 1. Level of Economic Development. Generally, less developed countries provide weaker legal protection for intellectual property than do industrialized nations. While less developed nations feel they have little to gain by protecting intellectual property, developed nations feel it is critical to assuring continuing creativity. 2. National Cultural Attitudes. Countries with a more individualistic orientation view intellectual property as intrinsically legitimate.

In contrast, countries with a more collectivist orientation extol the virtues of shared ownership. READING 2 POLITICAL SYSTEMS Political system: Structures, processes, and activities by which a nation governs itself. A. Politics and Culture 1. A nation's political system derives from its history and culture. 2. Factors such as population, age and race composition, and per capita income influence a country's B. Political Participation 1. Participation occurs when people voice opinions, vote, and show general approval or disapproval of the system. 2.

Wide participation occurs when people who are capable of influencing the political system make an effort to do so. Narrow participation occurs when few people participate. C. Political Ideologies Political systems fall on a continuum defined by three political ideologies. Anarchism is the belief that only individuals and private groups should control a nation's political activities. Totalitarianism is the belief that every aspect of people's lives must be controlled in order for a political system to be effective. Pluralism is the belief that private and public groups belong in politics. . Democracy Democracy: Political system where government leaders are elected directly by the wide participation of the people or their representatives. A. In representative democracies citizens elect individuals from their groups to represent their political needs and views. B. Representative democracies strive to provide: Freedom of expression; periodic elections; full civil and property rights; minority rights; and nonpolitical bureaucracies. C. Democracies tend to maintain stable business environments through laws protecting individual property rights.

Although participative democracy, property rights, and free markets encourage economic growth, they do not always do so. 2. Totalitarianism Individuals govern without the support of the people, government maintains control over many aspects of people's lives, and leaders do not tolerate opposing viewpoints. Totalitarian governments share three features: imposed authority, lack of constitutional guarantees, and restricted participation. A. Theocratic totalitarianism: political system in which religious leaders govern without the support of the people and do not tolerate opposing viewpoints. . Secular totalitarianism: political system in which leaders rely on military and bureaucratic power. I. Communism: obtain social and economic equality only by establishing an all-powerful Communist Party and by granting the government ownership and control over all types of economic activity. Ii. Socialism: obtain social and economic equality through government ownership and regulation of the means of production. Iii. Tribal totalitarianism: one rib (or ethnic group) imposes its will on others with whom it shares a national identity. V. Right-wing totalitarianism: government endorses private ownership of property and a market-based economy but grants few (if any) political freedoms. Leaders strive for economic growth but oppose left-wing totalitarianism, or communism. C. Doing Business in Totalitarian Countries: Companies need not be concerned with political opposition outside the government. Doing business can be risky because the law is vague or nonexistent, and people in powerful government positions can interpret laws at will. 3. Implications

Democracies strive to guarantee civil and property rights whereas totalitarian governments can repeal them. Democracy does not guarantee rapid economic growth nor does totalitarianism ensure slow growth. People around the world are demanding greater participation in politics and many nations are abandoning totalitarianism. Globalization is playing a role. POLITICAL RISK Political risk is the likelihood that a government or society will undergo political changes that negatively affect local business activity. It can threaten an exporter's market, manufacturing facilities, and the ability to repatriate profits.

Political risk rises from: Corrupt or poor political leadership Frequent changes in the form of government Political involvement of religious or military leaders An unstable political system Conflict among races, religions, or ethnic groups Poor relations with other countries A. Types of Political Risk Macro risk threatens all companies regardless of industry and affects all companies equally in a country, both domestic and international. Micro risk threatens companies within a particular industry or even smaller groups. Five events can cause political risk: 1 . Conflict and Violence a.

Local conflict discourages international investment. Violent disturbances hinder manufacturing, obtaining materials and equipment, and recruiting talented personnel. B. Can arise from resentment toward the government. When dispute resolution fails, violent attempts to change political leadership may ensue. C. Can arise from territorial disputes. D. Can arise from ethnic, racial, and religious disputes. 2. Terrorism and Kidnapping a. Used to make political statements. Groups dissatisfied with current political or social situations try to force change through fear and destruction. B. Kidnapping and hostage-taking can fund terrorism. . Property Seizure a. Confiscation is the forced transfer of assets from a company to the government without compensation. There is no framework for legal appeal, and compensation is far below market value. B. Expropriation is the forced transfer of assets from a company to the government with compensation. C. Nationalization involves government takeover of an entire industry and is more common than confiscation and expropriation. It is used (1) to obtain control over cash flows, (2) for ideological reasons, (3) as a political tool, and (4) to support industries in which private companies do not invest. . Policy Changes a. Result from newly empowered political parties, pressure from special interests, and civil or social unrest. B. One policy tool restricts ownership to domestic companies or limits ownership by non-domestic firms too minority stake. C. Other policies relate to investments made across borders. 5. Local Content Requirements a. Specify an amount off product to be supplied locally. Fosters local business parts from local suppliers, or employ local workers. They can force a firm to take on poorly trained or excess workers, and local raw materials could increase costs or reduce quality.

B. Managing Political Risk Companies manage political risks that threaten operations and future earnings. 1 . Avoidance: 2. Adaptation: Incorporate risk into business strategies, often with the help of local officials. A. Local equity and debt involves financing local business activities with the help of local firms, trade unions, financial institutions, and government. B. Localization entails modifying operations, the product mix, or other element to suit local tastes and culture. C.

Development assistance allows an international business to assist the host country in developing distribution and communications networks ND improving the quality of life for locals. D. Partnerships can be used to leverage expansion plans through informal arrangements or Joint ventures, strategic alliances, and cross-holdings of company stock. E. Insurance can be used to protect companies against losses and can provide project financing. 3. Information gathering: Predict and manage political risk. Sources include employees with information and political risk agencies. 4.

Influencing local politics: Deal with local lawmakers and politicians directly or through lobbyists. A. Corruption I. Bribes are one method of gaining political influence and are routinely used to get strictures and retailers to push a firm's products through distribution channels. It. Foreign Corrupt Practices Act forbids U. S. Companies from bribing government officials or political candidates in other countries (unless a person's life is in danger). A bribe constitutes "anything of value" and cannot be given to any "foreign government official" empowered to make a "discretionary decision" that may be to the payer's benefit. Ii. Corruption leads to the misapplication of resources, hurts economic development, distorts public policy, and damages the integrity of "the system. " LEGAL SYSTEMS Set of laws and regulations, including the process by which laws are enacted and enforced and the ways in which courts hold parties accountable for their actions. It is influenced by cultural variables, including class barriers, religious beliefs, emphasis on individualism or conformity, and the political system.

Totalitarian governments favor public ownership and enact laws limiting entrepreneurial behavior; democracies encourage entrepreneurial activity and protect businesses with property-rights laws. A. Types of Legal Systems 1. Common Law Tradition: Country's legal history. Precedent: Past cases that have come before the courts. Usage: Ways in which laws are applied in specific situations. A. Originated in England contracts tend to be lengthy because they consider many contingencies and possible interpretations in case of dispute.

Common law systems are flexible, taking into account particular situations and circumstances. C. Practiced in Australia, Britain, Canada, Ireland, New Zealand, the United States, and some nations in Asia and Africa. 2. Civil Law a. Based on a detailed set of written rules and statutes that constitute a legal code. Can be traced to Rome in the fifth century B. C. And is the oldest and most common legal tradition. . Can be less adversarial than common law because it is not interpreted according to tradition, precedent, and usage.

Because laws are codified and concise, parties are concerned with the explicit wording of the code; obligations, responsibilities, and privileges follow the relevant code. C. Practiced in Cuba, Puerco Rice, Quebec, Central and South America, most of Western Europe, and parts of Asia and Africa. 3. Theocratic Law a. Legal tradition based on religious teachings (e. G. , Islamic, Hindu, and Jewish law). B. Islamic law is the most widely practiced theocratic legal system today. It was initially code governing moral and ethical behavior and was later extended to commercial transactions.

It restricts investments and sets guidelines for business conduct. C. Firms operating in countries with theocratic legal systems must be sensitive to local values and beliefs. Must evaluate business activities, including hiring practices and investment policies, to ensure compliance with the law, local values, and beliefs. GLOBAL LEGAL ISSUES Laws related to product quality, product liability, environmental pollution, and employee treatment are tougher in European countries and the United States than in Africa, Asia, and Latin America. Legal differences can develop into ethical issues.

A. Intellectual Property 1 . Results from intellectual talent and abilities such as graphic designs, novels, computer software, machine-tool designs, and secret formulas. 2. Property rights are the legal rights to resources and any income they generate. Intellectual property can be traded, sold, and licensed in return for fees and/or royalty payments. 3. Nations vary in such laws and their enforcement. A. Industrial Property includes patents and trademarks-?often a firm's most valuable assets. Laws protecting industrial property are designed to reward inventive and retrieve activity. I.

A patent is a right granted to the inventor of a product or process that excludes others from making, using, or selling the invention. WTFO grants patents for 20 years. I'. Trademarks are words or symbols that distinguish a product and its manufacturer. Trademark protection lasts indefinitely, provided the word or symbol continues to be distinctive. B. Copyrights give creators of original works the freedom to publish or dispose of them as they choose. I. Copyright holder can (1) reproduce the copyrighted work, (2) derive new works from it, (3) sell or distribute it, (4) perform t, and (5) display it publicly. I. Copyrights are protected under the Berne Convention and the 1954 Universal Copyright Convention. 1 . Standardization refers to uniformity in interpreting and applying laws in more than one country, not to the standardizing of entire legal systems. 2. Treaties and agreements already exist in intellectual property rights, antitrust (antinational) regulation, taxation, contract arbitration, and general matters of trade. 3. International organizations that promote standardization: the I-IN, COED, and International Institute for the Unification of Private Law. . The EX. is standardizing some areas of its nations' legal systems. C. Product Safety and Liability 1 . Most countries have product safety laws that lay down standards to be met by manufactured products. Product liability holds manufacturers, sellers, and others, including individual company officers, responsible for damage, injury, or death caused by defective products. 2. The U. S. And Europe have the toughest product liability laws. Less-developed and emerging countries have the weakest laws. D. Taxation 1 .

Tax revenues needed to pay government salaries, build military capacity, and shift earnings from people with high incomes to the poor. 2. Consumption taxes are indirect taxes that help pay for consequences of using a particular product and to make imports more expensive. 3. A value added tax (VAT) is a tax levied on each party that adds value to a product throughout its production and distribution. E. Antitrust Regulations 1 . Antitrust (antinational) laws are designed to prevent companies from fixing prices, sharing markets, and gaining unfair monopoly advantages.

Such laws provide a wide variety of products at fair prices. 2. The United States and European Union eave strict antitrust regulation and are strict enforcers. In Japan, the Fair Trade Commission enforces antitrust laws, but it is often ineffective because absolute proof of wrongdoing is needed to bring charges. 3. In strict antitrust countries, companies see a disadvantage against competitors whose home countries condone market sharing, whereby competitors agree to serve only designated market segments.

ETHICS AND SOCIAL RESPONSIBILITY International managers are exposed to different conceptions of ethical behavior and guidelines for socially responsible behavior. Child labor, human rights, the environment, and plant closings are the heart of debates over impact of multinationals. Managers must monitor behavior of themselves, employees, and business partners. 1. Ethical Behavior a. Ethical Behavior is personal behavior in accordance with rules or standards for right conduct or morality. B.

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