Question

1. Explain the components of political and of legal systems including their role within a country. Discuss why it is important for an international business to understand these systems, use examples of how lack of knowledge of these components could lead to increased risk by an exporter or foreign investor.

Answer 1

The question can be answered in two parts:

1) Political systems impacting domestic and international businesses within a country and case examples.

*case examples in Italics

The political environment of the country of operation is important for MNCs from the perspective of FDI and exports for market entry. Exporting firms are likely to use political pressure tactics to have free exportability of the products in their home country regulations, hassle-free procedures, and legislative requirements and export incentives.

Diplomatic channels

Diplomatic channels are utilized to get improved market access for imported goods in the target foreign country markets, reduced import tariffs, compatible quality regulations, etc. The dispute settlement mechanism, legal framework, and judicial independence are also critical to fair treatment expected in international business.

Political relationships

Cordial political relations between the firm’s home country and the host countries have a favorable impact on FDIs. As a firm expands internationally and begins to operate in multiple countries, the political and legal issues become increasingly complex.

International manager’s perspective

Firm-level economic and political interests of the home and the host countries may differ widely. International managers need to understand the significance of political decision-making in the host country that may severely influence its overseas operations.

International business relations between the firms are greatly affected by ‘affinity’ or ‘animosity’ among the countries based on historical or political reality.

For example, USA’s political affinity with Canada and Mexico has led to high level of trade and investment whereas the reverse situation exists in US and China’s relationship.

International Political Systems and Ideologies

International political and economic systems hardly function independently. The two are mutually inter-dependent. Political and diplomatic relations between two counties greatly influence their economic relations.

The political system of a country comprises various stakeholders, such as the government, political parties with different ideologies, labor unions, religious organizations, environmental activists, and various NGOs.

Each of these players in a political system has its own unique sets of beliefs and aspirations, and exerts its influence upon political decisions. The acquisition, development, securing, and use of power in relation to other entities, where power is viewed as the capacity of the social actors to overcome the resistance of the other actors is termed as political behaviour?

Power exerted by different pressure groups also varies from country to country.

For example, communist or socialist parties in countries, such as Russia and China hardly face any considerable challenge whereas such parties exert political pressure in countries like India, Sweden, Italy, and Greece. On the other hand; these parties hardly have any political viability in the US. Most religious organizations are apparently politically neutral in India, whereas the Catholic Church played a crucial role in overthrowing Ferdinand Marcos in the Philippines and in the liberation of Poland from Soviet domination. Islamic religious leaders in Iran greatly influence political decision making.

2) Legal systems impacting domestic and international businesses within a country

I am not aware of all the laws, but will try to present a holistic view with some examples:

The business legal environment plays an important role in determining the success of any businesses around the globe. The government taxes that are being imposed among other regulatory measures help to promote economic growth and to protect consumers from exploitation and other illegal factors.

Legal Factors Affecting Business Environment

Organizational Law

Any business that is organized as a legal entity is subject to the state law that governs its operation and conduct. There are different types of business entities. For example, corporations, limited partnerships, partnerships, limited liability partnerships, limited liability limited partnerships and limited liability companies all of which have different legal status and issues.

Securities Law

If a business is seeking to obtain financing through different types of investors, it may be subject to legal issues such as security law. For instance, a decision to offer promissory notes, a type of loan to investors, will subject the legal factor affecting business to state and federal regulations and security laws.

Contract Law

If the intention is to enter an agreement with another person or entity, then contract law is binding. This also has a special area that is involved directly with factors affecting business, for example, government contracts, which is also known as government procurement laws.

Consumer Protection

Some businesses act unfairly towards their consumers. For this reason, most countries have consumer protection laws that are aimed at ensuring that consumers are protected.

Here are some examples;

Weight and Measures Act: These laws ensure that the goods sold are weighed on Standard weighting equipment.

Trade Description Act: This law ensures that it is illegal to deliberately give misleading impression about products.

Consumer Credit Act: According to this Act, consumers should be given information of the credit agreement and should be made aware of the interest rates, length of loan while taking a loan.

Sale of Goods Act: This Act declares that It is illegal to sell products with flaws or problems and that any goods sold conforms to standards.

Employees Protection laws

Different governments have passed laws to protect the interest of employees. These laws protect them against unfair discrimination at work and when applying for jobs. It ensures that no one is discriminated against based on such things as race, religion, sex, age, or color.

Laws for health and safety at workplaces

• Employees must receive protection from dangerous machines.
• At the workplace, employees should be given clothing and equipment that meet the highest safety standards.
• Employees should have a reasonable temperature at their workplaces.
• The highest hygienic standards at the workplace and washing facilities should be met for the sake of employees.
• Employees to have enough breaking periods while working.
• Security against haphazard termination of employees

Immigration laws

It ensures controlled immigration within the country. It also protects the interests of the local citizens against the immigrant population.

Government Procurement Laws

The government, through its contracting rules regulations and procedures, dictates the way businesses work with it. It not only actively encourages small businesses to participate in expressing interest when it purchases products and services, but it also goes to great lengths and spends lots of money in outreach programs to find good, qualified small businesses to be its suppliers to avoid legal factors that would affect their business.